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Silver - Be Long, But Not A New Buyer Up Here. Wait For A Break.

May 01, 2011 5:48 PM ET
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Seeking Alpha Analyst Since 2009

Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he managed money in the cash bond market for a $5 billion pension fund using Peter Steidlmeyer’s Market Profile. Proficient in Gann, Elliott Wave, Market Profile, etc, Mr Noonan no longer uses any of those technical procedures. Instead, his primary focus is on developing market activity, relying solely on the information generated by the market itself, such as the interaction between price and volume, and how they relate to important price levels in the market structure. He incorporates proven market principles, such as knowledge of the trend, supply and demand, along with disciplined rules for to find developing high probability trade opportunities. He can be reached by e-mail at his website: mn@edgetraderplus.com

Sunday  1 May 2011

 There are so many solid reasons for being long silver, and gold,
but silver is likely to continue to  outperform gold on a relative basis. 
The recent runnup can be attributed to a slew of reasons, all of
which make sense, the politically ludicrous self-destruction of the
fiat Federal Reserve Note by the Fed, making the United States
the largest debtor nation in world history which spells out the fate
of the country, China and India buying, among other reasons.  If
you are not yet long silver, it could be problematic buying it at
current levels.  The exception to that is if one is buying the
physical metal, including gold, and holding.  There are no margin
issues for that, for the price of silver is certainly headed higher.

 The note of caution for new, and even recent buyers is the level
of risk exposure.  The higher the price of any commodity, the
greater will be the swings.  A recent example is our last purchase
effort last week.[See Silver And The S & P - A Tale Of Two Markets,
click on http://bit.ly/lEsnLH, 2nd, 3rd, and 4th charts with explanations
in between.  That trade ended up being a day trade, buying at 45.14
and selling half at 47 and the other half at 48.  In "normal" times, that
would be a good trade for a week.  While price has remained above
the exit level, there are no hindsight regrets of "selling too soon." 
The volatility since has been great...too great for a rational
risk/reward context.

 The reason for our note of caution stems from reading the chart
over the weekend.  With charts, if you want to know where a
commodity is going, you HAVE to know where it has been.  Last
week's activity is enough to give us pause.  Others may see it
differently, of course.  The recent highest volume occurred last
Monday.  That is a huge amount of effort, and what were the

 A quick observation of market behavior, first.  Smart money,
[controlling market forces], buys bottoms and sells tops. Consider
that axiomatic, for that is where the transfer of risk occurs, from
weak hands into string hands.  Silver is at the old "Hunt Brothers"
high, the $50 level.  If we know that smart money does not buy
highs, who would be doing all the volume on the buy side,
[Johnny-come-latelys], and who would be on the other side of the
trade?  [You only get one guess!]

 The location of close is under mid-range the bar, 5th from the end. 
That tells us sellers were in control, otherwise the close would be
higher that day.  What has happened since?  Four trading days later,
the price of silver has not made a higher high .  The second to last
bar on the chart was another rally attempt, but once again, note the
close.  This time, it is on the low of the range, and we see sellers
continue to dominate the day's range at high levels.  Friday's activity,
the last bar, is a small range-inside day bar with a close just above
mid-range the bar.  We see that as a lack of demand.  A lack of
demand can lead to sellers taking over.

 The trend in silver is UP, and in an up trend, one wants to be long. 
That does not mean it is safe to buy anywhere.  There has been a
concerted effort from some big name Wall Street firms that do not
want to see gold and silver rally, and said firms have been short
and choking on their efforts, efforts to keep a lid on the reckless
creating of fiat currency from getting out of hand, which will be
inevitable.  Did we mention Goldman Sachs as one of those Wall
Street firms?

 The margin rates on silver have increased, which is normal as
prices rise.  What cannot be considered normal would be a 175%
margin increase over the CME's recent 9% margin hike.  What
firm would do such a thing, for such a huge increase reduces
many trader's ability to participate in the silver market.  It was the
firm M F Global that raised silver margins so dramatically.  Wait! 
Isn't M F Global headed by Jon Corzine?  Why yes.  There is more. 
Jon Corzine happens to be a former senior partner at, guess
which firm?  That is right, Goldman Sachs.  Small world, and an
example of how sometimes "smart" money gets it wrong.  There
are countries that have deeper pockets than some Wall Street firms, and even the little guy has been buying silver in
unprecedented amounts, via the silver Eagle.

 It would be healthy to have a market correction, especially near
previous resistance, the $50 level.  Silver could make another new high, perhaps in a probe to get more late-comers to join in, and
then wash out all the weak-handed buyers in a sharp correction.

 One does not have to have deep pockets like "smart money"
buyers to act like them, and that would be to buy breaks and not
buy new highs, especially after an accelerated rally.  A rather
simple formula that seems lost on so many.


SIN D 1 May 11

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