Tim Walker
Tim Walker

When we look at the precious metals complex, we see that while interest in the popular press and even amongst traders is centred on Gold, there may be equal or even better trading opportunities in Silver. An outstanding performer of recent times. Even a casual glance at the chart shows that over the past 6 months simple ABC long trades have been consistently successful.

Chart 1 – Recent ABC Long Trades

click chart to enlarge

This article is being written on 13th April, so you may want to check out the current ABC trades, as they’re equally interesting. But even when you’ve had a run of successful trades, you should always keep an eye on past high and low levels.

For Silver, we have to go back a long time to find this, over 30 years in fact. For many, looking at a price chart of recent history, would assume that Silver was trading in all-time high territory. However, if we look at a longer-term perspective, we find a high in January 1980 of 42.80, very close to the ‘Point B’ of the current ABC trade in April 2011 of 41.98.

Chart 2 – Silver Monthly Chart

click chart to enlarge

The question that would arise immediately is whether there is any value from looking at a high made so long ago. Could it possibly still have any effect on this market? My answer would be that we should definitely consider it, for there are 2 possibilities:

  1. Prices will cross the old top level, which will indicate still higher prices
  2. A reaction will develop, of shorter or longer duration

While this may seem obvious, the market is clearly at a decision point, to keep you on the right side of it, follow the trading rules in the Smarter Starter Pack and Number One Trading Plan, combined with the trade evaluation strategies taught at the Interactive Trading Workshop.

This is what Gann has to say about a market that can break into new high prices after many years:

“When a stock advances or declines into new territory, or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reached another dam, or some obstruction or resistance which would stop it. Therefore, it is very important to watch old levels of stocks. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce a larger movement than if it only accumulated during a short period of time.”

Truth of the Stock Tape, p.122

Paradoxically, the best situation for Silver bulls would be to see a reaction around this time. This allows the market to take a breather and accumulate its strength for another advance. If this were to eventuate, a logical place to watch would be the 50% retracement of the recent move, as indicated in Chart 3.

Chart 3 – 50% Retracement Level

click chart to enlarge

Silver trades on the New York Mercantile Exchange, which is now part of the CME Group. The Contract Specifications can be found at the following link: silver_contract_specifications

In the last couple of articles I talked you through these, so this month look them up, to get you more comfortable navigating around these exchange website pages.

The margin for the full contract is not for the faint-hearted, at a hefty US$11,745 per contract. Fortunately there is also a mini, which is half the size of the full contract.

Knowledge is Power!

Tim Walker