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Silver - Context: Accumulation Likely Underway. Recent Sell-Off Low Is Key

May 29, 2011 9:26 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  29 May 2011

 The way we see silver is that it remains in a strong uptrend, the
recent almost $18 break notwithstanding.  It appears to now be
undergoing accumulation, setting the stage for the next "Act of
Rallys."  The best way to show this is through the market's own
language, as seen in both price and volume activity, always the
best and most reliable source of market information, for it is the
distillation of the cumulative statement made between the forces
of buyers and sellers.

 One thing to know about all markets is the constant testing and
retesting of support and resistance, and this goes on in all time
frames.  It is the way for smart money to determine the strength/
weakness of a market, and to see what, if any, supply/demand
exists along the way.  It is also a way for the market to build a
base from which will ensue the next phase, either mark-up in
a bull market, or mark-down in a bear market.  Such a base is
necessary in order for any subsequent move to be sustained.

 Context is critical to market understanding and knowing in which
direction to position, and the best direction is always with the
existing trend in the time frame traded with an awareness of
important points from the next higher time frame.  A great way to
put any market into a context is to extract the known, observable
facts from previous market activity, for they reveal market intent.

 To exemplify the notion of markets always testing and retest, not
shown on this chart, but the last important high for silver was the
$50 level back in 1980.  It took over three decades to do it, but
that high was retested this past April.  Of course, not all retests
take decades.  The point is to always be aware of past market
price history constantly carried forward to the present.  Our focus
of testing and retesting goes to a daily chart.

 Price show a waterfall decline from the retest of the April high. 
Note how volume increased substantially as price broke from the
$48 level and reached a crescendo on the 5th and 6th of May. 
The story of facts begins from there.  We draw your attention to
the two arrows pointing down.  They are wide range bars to the
downside, with the highest volume on the 5th, the first down arrow. 
These are the efforts from sellers.  What we know about
exceptionally high volume days is that they can mark a transfer
of risk from weak hands to strong, or strong hands to weak,
depending upon market direction.  We inspect these days, along
with the two others, to see if the facts of market activity support
this market observation about a transfer of risk.

 What we also know about the silver market is that is has been the
strongest of bull markets, recently.  We said, back on 9 May that
the then precipitous correction was actually a needed and healthy
one for the market, [See Silver - A Healthy Correction Underway,
click on http://bit.ly/jslwTo first paragraph, and additional references
to this article will be made, later].

 As we look at the activity of 5 May, note the close on the day of the
largest volume: it was almost at mid-range the bar.  What that tells
us is that despite the overwhelming selling activity, there were
buyers present at the lows.  This is a fact.  Next day, on the 6th, we
see the second highest volume, and yet another down day, but...
not all down days are equal, so what makes this one different?

 One, the bar size is much smaller, and the reason why it was
smaller is because buyers were again present, preventing the range
from extending lower.  We know this is a fact because if there were
not buyers supporting the market lower, the range would have
continued lower and been larger, as it was the previous day.

 Two, note the close: not only is it on the upper end of the range,
but it is also above the open, unlike the previous day when price
closed off the lows but still lower than the open.  This is another
observable fact, and it adds to the idea that buyers were even
stronger in support on this day than the previous high volume day. 
This begins to address the premise of exceptionally high volume
days often being a transfer of risk, in this instance from weak hands
into strong as the public begins to panic out of the market, unable
to sustain large losses and/or meet margin calls.  Up arrow 1
successfully counters down arrow 1.

 Note as we go along how a context of the market internals is
developing, setting the stage, as we said, for the next market
move.  Each step builds on and adds to the next, much like
piecing a puzzle together.

 Before going to Down arrow 2, the little 2day rally off Up arrow 1
took place on much less volume, and the small range of the second
day tells us that demand was weak and to expect sellers to reenter
the market.  This leads to Down arrow 2.

 The factual observation we can make here is that the bar range
has increased as price sold off, and the close was weak, right at
the bottom.   Go Bears!?   Note how volume was not nearly as
great as volume when price sold off in the previous week.  What
about the net result?  After a wide range and poor close, what was
the damage?  The close that day was about equal to the close
from the 6th.  We should expect to see downside continuation,
next day, and that is exactly what happens. 

 Go Bears!?

 Look what happens on Up arrow 2.  Price makes a new recent low,
but the close is near the upper part of the bar and well above the
recent lows from the 5th and 6th.  Volume increased on this pivotal
day, much higher than the previous selling day, yet the close of the
bar tells us that buyers were in control. The market gives us
confirmation of these observable fact over the next three days as
the latest low is retested.  The fact that the third day of the retest
has such a small range and lower volume tells us that the selling
pressure is drying up. 

 Go Bears?  Where?

 Factual evidence is supportive of weak sellers falling into the
hands of strong buyers, a simple market axiom that never changes. 
We were early in our supposition that the initial low from the weekly
chart in the previous article, [click on http://bit.ly/jslwTo, and see
chart], but we were not far from being right.

 SIN D 1 29 May 11

 We removed the arrows from the above chart and added a few
support/resistance lines for clarity in explanation of developing
market context.  The spacing we showed in the previous article
now shows the pivotal low of 32.30 as key.  It remains above the
previous swing high from January.  What this concept of spacing
says is that bulls are eager to buy at existing levels without waiting
for the market to fall further, and they want back in, NOW.  That
is a bullish indicator, and yet another market fact to add to the
ones already made.

 Usually, the high volume down bar will be defended by sellers,
and that would be the trade of the 5th. However, it appears from
an intra day perspective that the second Down arrow day is more
pertinent.  Next chart.

 SIN D 2 29 May 11

 We show the last failed rally at the 39.50 area as the next
potential resistance, but what took place lower in market activity is
far more important.  Now we can break down and dissect the daily
bars to see if they are more revealing, and they do not disappoint. 
On the low of the 6th, the bar at the low, on this 60 minute chart,
and the one that follows, both are strong rally bars with equally
strong closes and on nearly highest intra day volume.   That
speaks to buyers at the lows, plain and simple.

 At this particular point in time, all the news is focused on how
silver is crashing!  Where will it end!  Panic selling !  etc, etc.  Some
things never change when it comes to news reporting the markets. 
The market activity was telling a different story!  It still needed
confirmation, to be sure, but from what can be seen is that buyers
were taking EVERYTHING offered by weak, panicky sellers.

 The initial positive price reaction on the 6th now becomes
potential support, and the failed rally follows. What is important now
is HOW the initial support is tested.  The speed of the descent on
the 11th tells us support may or may not hold.  The "may hold" part
comes from the lesser volume on the decline.  Less volume = less
selling pressure.

 Here is where we see smart money taking control.  The failed
probe, the test of the 6th provides important information.  Smart
money does not like company, and they want to make sure weak-
handed buyers are spent.  They take the market lower, to new lows,
and what do they find?  No new sellers coming to press the market
lower, and whatever stops existed under $33 were minimal and now
wiped out.  This sets the stage for a rally.

 It does not go very far by the 13th, but smart money is patient.  The
news is still all about a silver panic and even a breaking of the bull
market.  The REAL market is quietly telling a different story.  After
the 13th, the market sells off again, and it retests the failed probe. 
Look where the retest stops:  at the initial support point from the 6th.

 Look at the character of the sell-off on the retest.   GONE are the
high volume, wide range bars to the downside.  WHERE ARE THE
SELLERS all the news mongers are saying are now in control?  It
takes two and one half days of gradual decline to retest the failed
probe after a rally that only took a day.  Clearly, or not so clearly if
one listens to the news of the day, the NATURE of selling activity
had disappeared, and buyers were clearly active down here.

 What were we saying back then?  While certain Wall Street firms
were directing the CFTC and COMEX to raise margin rates to
prohibitive levels, there were other ways to be in the silver market,
and we recommended the best one: buying physical silver. [See
http://bit.ly/jslwTo, last paragraph, above chart].

 That is what the facts were saying to do.

 SIN 60m 29 May 11

 Getting the intra day chart up to date, the initial weak rally that led
to the last retest was itself retested on the 24th.  See how price
failed to back away from previous resistance.  Weak reactions
lead to higher prices.
  [Take note!]  And what happened after 
price rallied above that little resistance from the weekend on the
15th?  It was retested on the 26th. 

 The market is likely to engage in a trading range, and we believe
we have identified the bottom of it, with support starting at the 36.50
area, and strongest just under 33.00.  We expect to see more
sideways activity, with an upward bias, as the market rebuilds a base
from which to launch into the next phase of this bull market, and next
time around, the $50 level will not repel advances as it did in April.

 Go Bulls!!!

SIN 60m 2 29 May 11

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