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KELTNER CHANNELS


In Silver, Keltner Clash No. 7 Approaches

11/05/10 11:07:54 AM
by Donald W. Pendergast, Jr.

Apparently, metals traders feel that the announcement of the highly anticipated quantitative easing was more than a little inflationary, propelling gold and silver even higher. Will the silver market finally peak at or just beyond a key, rarely exceeded, resistance level?


Security:   SI, SLV
Position:   N/A

Calling market tops is exceedingly frustrating and is the cause of many unnecessary trading losses -- I've been there, done that, and don't plan on going back. That said, with the silver market rapidly accelerating (again) toward the outer limits of extreme Keltner channel resistance, we at least have a line of demarcation to be aware of and maybe a tentative plan of action, should this resistance level be exceeded soon. Here's a brief look at the exceedingly bullish situation in the silver futures market.

FIGURE 1: SILVER, WEEKLY. No one knows how high silver futures will go, but at least the weekly Keltner channels confirm that this market is in a major trending move. There have only been six occurrences since 1993 where weekly silver prices have closed at and/or above the upper Keltner channel.
Graphic provided by: TradeStation.
 
What a trend move. With December 2010 silver futures (SIZ10, YIZ10) now trading above $26.00 per ounce, could $30.00 be attainable by year-end? Who knows, but right now, let's take a look at a very interesting situation on the weekly continuous silver futures contract. Plotted on Figure 1 is a Keltner channel, set 7.5 average true ranges (ATR) away from a 45-week exponential moving average (EMA). On only six occasions has the upper band been reached and/or exceeded (July 1993, February 1998, January 2004, April 2004, April/May 2006, and March 2008). At the current rate of ascent, it may not be too many more weeks (months?) until silver touches and/or exceeds this rarely realized resistance zone.

Invariably, silver futures reverse sharply lower after either touching and/or exceeding the band, and that's important to know. But it's even more important to know how to exit your current long silver futures position or even go short once you see the prices close back inside the band after spending some time above them. Here are a few ideas that you may be able to use to your advantage.

FIGURE 2: AGENT ARGENT TRADING SYSTEM. Could you handle five losing trades in seven trading sessions? Despite those losses, this system will actually turn a good profit (approximately US$2,000) as long as the current open long trade closes out at or above its current trailing-stop price.
Graphic provided by: TradeStation.
 
Let's say that silver really is at the beginning of an insane parabolic thrust that goes all the way to $35.00. If that happens, what you need is for weekly silver futures (using a long-term weekly continuous contract chart is best) to shoot above the band and stay outside of it for a period of time before closing back inside (below) the band. That might be the start of a reversal lower, and it might not be. However, that could be an excellent time for long contract holders to close out their positions, given the propensity for silver to drop by 10%, 15%, or even 20% after each significant encounter with this upper Keltner channel.

Those looking to go short need to use extreme caution; you've got to wait for absolute trend reversal confirmation before considering a wild ride on the short side. Here's the minimum requirement:

1. A close or series of weekly closes above the outer band.
2. A weekly close back inside the band, especially after a pair of key reversal price bars.
3. A weekly swing low, preferably made at or just below the Fibonacci 23.6% retracement, followed by a failure swing attempt at the previous high.
4. If prices sharply reverse lower after the failure swing, then place a sell-stop at or near the weekly swing low referred to in #2. You'll likely have plenty of company, as tons of traders will be anticipating the break lower after a failed attempt at a new high.

You might want to use daily or even 30- or 60-minute bars to fine-tune your entry on such a potential short setup; more conservative traders with smaller accounts might want to stick with the LIFFE mini silver contracts (they are 1,000-ounce versions of the full-sized 5,000-ounce contract at the Comex) to limit potential risk.

If silver is destined for a 15% to 20% or even 25% correction once the next major high is made, you may not need to do anything fancier than run a volatility trailing stop for your short position on the anticipated ride south. When silver falls at major reversal points, it's not uncommon to see it shed $2, $3, or even $4 per week as panicked longs abandon ship. The next reversal in silver should be just as profitable on the short side, but don't overdo it. Trade on the conservative side and by all means set a firm stop-loss and use some sort of a trailing stop to help retain as much of your profits as possible.

Finally, take a look at the latest long signal by one of my intraday metals futures systems, Agent Argent (AA) (Figure 2). AA went long silver futures (SIZ10) again on Thursday morning, right after the open at 0940 ET. The position closed out the day with an open profit of nearly $3,700 (not including commissions and slippage on the entry). The trailing stop should lock in a profit of nearly $2,000 unless silver suddenly goes into limit-down mode, a rather unlikely possibility in this phase of the current uptrend. Using a system similar to this can also be a way for metals traders to participate in the silver bull market (and at some point in the future, the silver bear market) and help keep you disciplined in your trading activities. The two main advantages of mechanical systems trading are as follows:

1. All trading decisions are based on unbiased, objective statistical patterns and repetitive numerical sequences -- by a machine.

2. The trader gains confidence from a proven system's backtesting and walk-forward testing results, allowing him to trust the trading system's signals. This trust enables the systems trader to stay with the system, uninfluenced by the deadly emotions of fear and greed. Over time, such a confident trader will likely fare much better than his discretionary trading peers. There are some highly successful discretionary traders, but they are far and few between; traders using a proven system will probably do as well if not better than their discretionary counterparts, and with far less stress and worry to boot.

Systems trading may be one of the wisest ways to participate in the current metals mania, so do your homework; consider what your trading goals are and which systems vendor is most likely to have the system best suited to your unique trading temperament.



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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