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FIBONACCI


Minor Pullback Due In March Silver

01/05/10 12:01:04 PM
by Donald W. Pendergast, Jr.

Silver is in the midst of a brief rebound, one that may still have room to rise. Several solid support areas may offer traders a low-risk reentry point.

Security:   SI,SLV
Position:   N/A

March Comex silver peaked at $19.50 on December 2, 2009, and then plunged by more than 14%, hitting $16.765 on December 30, 2009. With both the weekly and monthly price cycles in full down mode, some technicians thought that this may have been the start of a full-scale correction down to major daily/weekly support in the mid- to upper $15 range, but the white metal apparently had made other plans for a slightly more bullish New Year celebration. We'll look at an interesting intraday chart of March 2010 Comex silver and see just what kind of technical picture has been provided for us, and if we can capitalize on a possible small-scale pullback to intraday support.

FIGURE 1: MARCH 2010 SILVER, 78-MINUTE BARS. Buying pullbacks in strongly trending markets is one of the lowest-risk, highest-reward trade setups available. Not only should the three Fibonacci retracement levels act as support, but the 21- and 50-period EMAs may also provide support for a tradable bounce higher.
Graphic provided by: Ensign Windows.
 
Figure 1 is the 78-minute chart for March silver. Yes, it's in full-tilt bullish mode right now, at least in this particular time frame, as evidenced by the following:

1. A stupendous, nearly parabolic rise in the aftermath of a moving average convergence/divergence (MACD) crossover near the indicator's zero line. These will typically follow through with some sort of trending move, but this one is exceptionally strong. Note that the previous MACD crossover, also near its zero line, rewarded long silver traders with a very nice percentage gain as well.

2. The double-bottom pattern (labeled as 1B and 2B on the chart) was also a tipoff that the ensuing MACD crossover was probably going to be one worth going long on. Note how the spread between the 21-period and 50-period exponential moving averages (EMA) (red and blue lines, respectively) was declining as the double-bottom pattern developed; this was a confirmation that a cycle low had already printed on the daily chart and that the most likely direction for prices was back higher.

3.Once the break higher commenced, the spread between those same EMAs kept widening, all the way up til the last bar on the chart completed.

4. Prices stalled just shy of the previous swing high of $17.69, and the MACD histogram reached an extreme reading, one not likely to go much higher (but it could still occur; this is the commodity futures market, after all, where nearly anything can happen) before some sort of pullback takes place. However, given the sheer power of this current upthrust, the trend bias is clearly toward further gains, meaning that shorting silver here is slightly less than suicidal.

Okay, now that we can be reasonably sure that this rally will likely have some staying power, we need to identify some strong support areas from which to initiate a long swing trade entry on a possible pullback. I have located the three most likely areas for support to manifest:

1. $17.40
2. $17.32
3. $17.23 / 17.21

The second and third support zones are stronger, composed of multiple Fibonacci retracement levels, although given the strength of this trend, perhaps a tradable intraday swing move could also materialize at the $17.40 level.

Bear in mind that the money flows are all supportive of further gains and that daily Fibonacci resistance doesn't arrive until about $17.80 and then again at $18.10, so there is little reason to doubt that the current uptrend would fail to draw in a substantial amount of fresh buying at any of the three support zones.

As far as timing an intraday or daily swing move goes, have you ever considered something as simple as a 10-period stochRSI indicator as an entry trigger? If silver pulls back gradually (not sharply) to one of the support zones and then prices reverse higher, causing the stochRSI to rise above its lower signal line, you may have as good an entry signal indicator as anything else available to traders. If filled, consider placing an initial stop a few ticks below the support area or entry trigger bar and then follow up with either a two- or three-bar trailing stop of the lows until the final stop out. It's not high tech, but this simple kind of entry/exit strategy can and does work, especially with a proportional pullback against an established trend. Give it a try or even paper-trade a few of these and see how it goes -- you may be pleasantly surprised.

One word of caution here: The higher time frame cycles (weekly and monthly) are still very bearish for silver, so it's still possible that we will yet see a nasty decline down into the sub-$16 vicinity within the next month or two. While the large speculators (hedge funds) aren't as bullish on silver futures as they were six weeks ago, there is still a substantial imbalance between the commercial interest positions and the large spec positions, and given that those ugly down price cycles will go to extremes every so often, wise traders will want to be ready to abandon all long positions at the first whiff of a bearish trend reversal, especially if silver rises much above $18.00. When silver decides to go south, it does so in style and at a high rate of speed, allowing skilled short-sellers the chance to make significant profits in a minimal amount of time. Keep watching those silver charts for prime short setups!



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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Date: 01/05/10Rank: 5Comment: 
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