Silver Breaks Out!

Metals Momentum

After 11 weeks plus of consolidation, silver is breaking out of it's tight trading range to the downside. I've always considered consolidation kind of like the gunpowder before a shot, or, if you have a pot of water boiling with a lid on it, when the lid is removed, it's going to have some steam behind it! The longer the period of consolidation, the bigger the breakout is going to be. Any readers that would like to discuss or see further examples of consolidation's effect on a market, feel free to contact me. For now, let's take a quick look at what silver's been doing on the daily chart.

Today, we saw a high percentage, high volume breakout of the trading range. Also the moving averages are rolling over. It's important to understand that silver has traded outside of it's range a couple times in the past. It has even settled below and broken out of the range early in it's consolidation. Immediately afterwards, silver went back into it's trading range of $30 - $35/oz. Just because a market breaks out of it's range does not guarantee there will be follow through. As demonstrated in these earlier examples, a breakout could be a head fake and return quickly to the trading range. Before making a trade decision and either closing your longs or opening shorts, you need confirmation of the breakout, i.e., follow through selling. If silver does not return to the outlined trading range or bounce above $30/oz, then we have confirmation of a breakout and we can expect to see some more selling happen very quickly. The HUGE spike in volume implies that there is a crowd behind the selling pressure.

It is difficult to determine a fair target or where the next nearest level of support is. This is because silver did not trade in the $20 - $30 range for very long on it's way up and therefore did not have an opportunity to develop much support. My gut tells me $25 due to the minor support shown on the weekly chart and also the psychological support and resistance that the crowd puts on whole numbers.

Think about gold trading between $300 - $500 for 25 years before breaking out of it's range in 2005. 25 years of consolidation has resulted in a major price change in the past 6 years for gold. Think about summer 2010, where silver traded between $17.50 -$18.50 for months. A very very tight trading range of only a dollar and four months of build up with a breakout the first week of September led to silver jumping to $49/oz. Consolidation is fuel to a fire, and a breakout of consolidation has always been one of my favorite and most reliable trading patterns. Combine high volume on the breakout with moving averages rolling over and silver failing to break the top end of it's range multiple times, and I believe the third wave of selling Ive been looking for has arrived. Best of Luck! AJL

Adam Laigo

Semper Pacific Wealth Strategies

metalsmomentum@gmail.com

Twitter: @PrcsMtlsGuy

Volume Interpretation in Silver

Metals Momentum

Volume Interpretation

I hope you had a Happy Thanksgiving. With US markets having a shortened week, there is naturally going to be less volume than we would see in a full trading week. With all trading vehicles, if you are dealing with a speculative and price changing market, it is important to take volume and open interest into consideration. Volume helps us to understand liquidity available in a market and whether or not a crowd is behind price movements. As a personal rule, I am generally wary of exaggerated price movement in a volume-shortened week.

When dealing with futures markets, there are other things to take into consideration, such as trader’s rolling out of a spot month prior to expiration and moving into the next liquid contract. This can be demonstrated in this last week simply by comparing the Dec 2011 Silver with the Mar 2012.

(Silver, Dec 2012)

(Silver, Mar 2012)

While the price movements are virtually identical, the volume and open interest tell opposing stories, both decreased in the spot contract while increasing in the March 2012. While shortened Holiday trading certainly contributed to the decrease in the spot month, we must also take expiration into consideration which is clearly demonstrated in March’s increase.

The bottom line for me is, the question of why a market is doing something is less important than understanding what it’s doing and how to respond to it. On that note, it is therefore important to take both charts into consideration with respect to trading. Clearly, silver is in a period of consolidation and congestion with a tighter price range than it has experienced in the past year. Lowering volume and lowering open interest during a tight period of consolidation is usually indicative of a break out. Both market months agree that there has been a recent spike in volume on down days with drops in volume on the up days. Silver also closed very close to low of the day, only $.10 higher than it’s low of the day and week. Not a very good sign if you are a long buyer right now.

The purpose of this article is not to predict what prices are going to do from here, but to try to read the signs of what it’s doing and encourage preparation in the case that certain market conditions are met. In this case, your actions should be reflective of your personal strategy. If you have the means to steadily accumulate regardless of price and are a long-term bull that does not need to take price swings into consideration, your strategy is different than if you have limited risk available to you.  You need to know how much you are willing to put at risk or where your risk tolerance limits are whenever you are in any type of trading market or financial vehicle that involves price fluctuations. If I were long, I would be selling and going short if silver confirmed a break out of it’s trading range to the downside with a buy stop a little over $31. A long position should hope for a bounce between here and $30 with continued consolidation between $30 - $35/oz. The longer the consolidation, the more strength it’s showing at these levels and the higher likelihood of a market breakout to the upside.

Know one can knows for sure what the market is going to do or which direction it is going to break out of. I believe there are a number of signs that show an increased likelihood of a breakout to the downside and the market going lower before it goes higher. Be prepared either way. Best of Luck to you!

Adam Laigo

Semper Pacific Wealth Strategies
metalsmomentum@gmail.com

Twitter: @PrcsMtlsGuy

Silver Synopsis

Metals Momentum

The long term fundamentals remain the same for the precious metals, including a long term downtrend in the value of the US Dollar, global economic uncertainty and high oil prices to name a few of many. The purpose of this article however is to break down the markets trading patterns and provide more in depth technical analysis based on chart patterns. Lets take a look at the weekly chart on silver.

Silver has been trading in a range between $30 -$35 an ounce for the past 8 weeks or so after it’s last sell off. Over the last 2 weeks it has tested near the $35 mark but failed multiple times to settle above it resulting in selling pressure, including a little over $3 drop between Wednesday and Thursday.

After a 176.33% increase ($17.92 - $49.52) over the course of 8 months, it became necessary for this market to correct and/or consolidate to digest it’s gains before this long term uptrend could continue. Looking at the first correction the 1^st week of May, Silver dropped from it’s highs all the way down to $35.28 close in a week. It does not matter if it’s precious metals, a commodity, currency, or any other trading market. When you have that much of a sell off in that short of a period of time, it usually isn’t finished in a single wave. It took until the 3^rd week of September to kick in but there was a clear 2^nd wave of selling which puts us into our current range of $30 - $35 an ounce.

After 2 major sell offs, the bias is for this market to break it’s range to the downside and have 1 more wave of selling. There has been failure to break above resistance in both gold and silver followed by selling pressure towards the lower end of the trading range. The increase in volume and open interest in the last week implies a increased opening of positions short. Unless you’re working with nominal trading costs and have the time available to trade the volatility, I would recommend waiting for this market to tip it’s hand and break outside of this range before taking a position.

For bulls, the longer it consolidates and trades in this range the better. This will give the market time to develop further support and strength at these levels. Wait for a confirmed breakout out of this range above $35 before purchasing with stops under $34. For bears, wait for confirmed breakout below $30 support before shorting with stops above $31. Remember, just because a market trades outside of a range does not necessarily confirm a breakout. Best of Luck

Adam Laigo
Semper Pacific Wealth Strategies
MetalsMomentum@gmail.com
Twitter: @PrcsMtlsGuy