Sunday 9 December 2012
One can take comfort in the maxim, "The Market Is Always Right," [or "Never Wrong"], in the realization that trading in harmony with it will make the odds of profitable success much higher than otherwise. Understanding and reading the market's message is an art form, for there is nothing mechanical about it. The market is totally unbiased, and it provides all the information it generates for everyone to see/read, at the same time. Just because you may not "see" it, does not mean the information is not there. If it remains hidden, then it remains hidden under the brightest light.
We happened to be looking at a daily silver chart, on Thursday evening, only to be struck with the fact that the trend is UP! If the trend is up, then one should be looking for a place to buy. What made that observation more meaningful was that the current correction developing in silver was stopping at a 50% retracement area. A half-way retracement is but a guide and not a hard and fast rule. There must be other circumstances in developing market activity that indicates a correction may be ending, and a resumption of the up trend is at hand. That meant we were viewing Friday's early activity with an intent to look for a reason to go long.
Before proceeding further, we should acknowledge for newcomers to our commentaries that we are strictly price and volume readers of developing market activity. The underlying premise is that all of the fundamentals, and all of the smart money, with the best and most current research information available, and all other market
participants who hold some kind of "belief" as to what the market may do, and all of the uninformed who buy or sell for any number of reasons, are what gets distilled into price action each and every minute, hour, day, along with the cumulative volume from all sources mentioned. This is how a high, low, and close is formed on a bar of any chosen time frame.
Smart money likes to hide their hand through deft buying and selling skills, but they leave "footprints," as it were, in the form of chart patterns. Do you know the best way to catch a bear? You can try following its paw prints on the ground and hope to catch up to it, and the bear may have turned around and be following you, or you can follow its footprints backwards, leading you to its den from where it came. Then, all you have to do is wait for it to return.
Charts are not much different. You look at all the activity that has transpired over a chosen period of time, and you are able to see buying or selling patterns that will lead to logical conclusions. Then, all you have to do is follow the lead and act accordingly. If you want information for the best and most reliable source available, you can do no better than "reading" results from developing market activity, as depicted in charts. Forget about news or opinions. Stick to the proverbial "horse's mouth." It cannot get any better. If you find it boring, well, you can lead that "horse to water," but… Then best stick to conventional sources and keep getting the same results. Back on point…
Because we already made a conclusion about the daily trend being up, and current price activity was correcting, it would make sense to buy near the end of a correction that is turning, or about to turn, than to wait for more confirmation, in higher price activity that would mean buying higher and increasing the risk exposure. To make a determination, we need to know the "story" of the market and put it into a context. For that, one always starts at the higher, more controlling time frames.
We can see from the monthly chart that despite silver moving mostly sideways for the past year, the current swing low is above the last swing high, shown by the two horizontal lines. The logic behind that factual observation, [and it is always better to deal in facts v opinions, which can often be biased or wrong], is that buyers were willing to buy at the current swing low levels without waiting to see is the last swing high would be successfully retested, so there is a sense of urgency on the part of buyers, aka smart money, at this point.
When you look at the last four bars, [for the benefit of any chart-impaired readers, follow the logic of what is stated to better understand what you are looking at in each chart. Eventually, it will make sense.], the fourth from the end was a rally bar, and it stopped at previous resistance, the 35 area, from the end of 2011 and into January, 2012. Note how the market has been correcting. For the last three months, it has moved sideways.
Now look at the second bar from the end. Price tried to go lower, and it did, but it did not find any more willing sellers, [or the market would have gone lower], and by the end of the month, price rallied to the top of the month's range, where it closed near the high. The location of the close tells us who won the battle between buyers and sellers, and the buyers clearly won. The market is giving us some insight into how the controlling forces are at work. What we want to see next is if the weekly time frame is supportive of the conclusions just made.
The market is in an obvious trading range on the weekly chart. We know for a fact that there is resistance when the price of silver get above 35.50, and there is entrenched support at the 26.00 level. We can also see a change in market activity that is different from previous down swings. In late September and December of 2011, and in May through August of 2012, the corrections reached the 26 area. The correction, as of the end of October, beginning of November have been unable to go under a half-way correction level, and that is generally a sign of market strength, a place where one would expect to see buyers defend against a decline.
You want reliable information from the market as a guide? Note the last bar in October. It was a wide range lower with a close right on the low, and it is the fourth bar lower from the recent swing high, at the beginning of October. Logically, you would expect to see more downside in the next bar. What happens? There is a marginal lower low, but price then rallies for the rest of the week. Not only does it close strongly, but it closes above the high of the previous down bar. The market is telling us that there is new-found support not evident from the last two down swings, and that is valuable information.
Next, we look at the last two bars on the chart. They are failing to go lower than the single rally bar that preceded them. Two weeks of selling effort are failing to go to the lows of one week of buying effort. Let us take a closer look at a daily chart to see if more can be learned.
Take a look at the fourth bar from the end, a wide range down, poor close, and increased volume. Sellers are in control. Or so it seems. Next day, a marginal lower low, but price holds and closes higher. What happened to the sellers? This looks similar to the monthly bar at the end of October when price closed poorly on a wide range bar down, but there was no follow-through, and price rallied. These patterns repeat, over and over on any time frame, and they provide us with valuable information.
Instead of lower prices, last week, we see three trading days moving up from the low on Tuesday. The bars are overlapping, and that tells us there is a struggle between buyers and sellers at an area where sellers were supposed to be in control, and buyers may be winning.
Price can be at a danger point, and we recommended buying, at 33.18, after the shakeout that developed in the first 30 minutes of the day's trading session. You will see why on a 30 minute chart of gold, below. We can be wrong, and price can continue to move sideways as the market develops new information, but we place a bet based upon present tense that was derived from recent market activity.
Because of the large bullish spacing and relatively weak correction on the monthly chart of gold, this remains a strong trending market. Even the past two and one-half months have been weak, [see last three bars of chart.] With the time spent reviewing silver, we can move much faster in gold.
Just as in the weekly silver chart, as price moves further along the Right Hand Side, [RHS] of the developing Trading Range, [TR], where a resolve is nearer to an end, the correction was unable to reach anywhere near the support level of the TR, a bullish statement. Both the monthly and weekly charts are providing a bullish outlook.
We get valuable information from the market during the recent correction on gold. Compare the ranges of the two high volume down bars. The second one, fourth bar from the right is smaller that the first one, four more bars to the left, yet the volume is a bit greater on that second down bar. This tells us there was an equal effort to push price lower from sellers, but the range narrowed a bit. Why? Buyers are meeting the effort of the sellers. How do we know this? The next three bars move sideways, instead of continuing lower, and the last bar, Friday, makes a marginal lower low, turns around and rallies to close strongly AND above the high of the previous bar. That is a relative sign of strength, after a sell-off on
To see how all of this developing market information led to a trade decision, we will show a 30 minute chart that triggered the decision to buy in both gold and silver when it may not have seemed as apparent from a casual observation of market action, that last day of the week.
We will try to make this as easy as possible, because we do not recommend intra day charts, unless for a specific reason, as this. The bars marked "High" are the highs that show the strongest effort from sellers to move price lower. On the third day, look at the persistent volume, all green, [meaning a higher close each bar].
The last day was Friday, and price spiked lower, sharply, with the highest volume of the past four trading days. Note where price closed on the bar…at the high end of the range. All that volume effort and the strong close tells us buyers overwhelmed sellers in a fast moving market. It was a shakeout of weak-handed longs. Price made the lowest low in four days, but for less than 10 minutes, and then rallied strongly.
From the higher monthly time frame, down to an ephemeral 30 minute time frame, there was a persistent message from developing market activity, information for anyone and everyone to see, that buyers were overcoming sellers, and this leads to a market turn, and when markets start to turn, that becomes a buying opportunity.
Long Feb Gold at 1703.20 and Mar Silver at 33.18, based upon the message from the market. We can still be a little off in timing, but the message is clear. This market will go higher, but it will move in steps, as determined by developing market activity that leaves "footprints" along the way.