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How I Called the Top in Silver, and You Could Have Too!

May 22, 2011 6:16 PM ET
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Seeking Alpha Analyst Since 2010

The Growth Stock Investor is a trader/investor who applies a fusion of fundamental, technical, and quantitative strategies for market timing, growth stock selection, and risk management.

Silver has recently fallen off a cliff, and in it is a great example of how to trade. While not expecting the acceleration of the decline, the decline was foreseeable using basic and easy price/volume relationships. In this, I want to show how to use basic charting for low risk trading. The annotations were made in real-time, and my instrument for trading this move was the ZSL as can be seen in covestor. Silver's recent price action had seen two major acceleration points into a very high volume week as can be seen below.


The first acceleration point occurred in late August as SLV made monthly highs and climbed for 8 straight weeks before its first negative week. This was a very strong sign of strength. The holding of its 4 period moving average also showed that this was not market to short. After a brief correction early in the year, the market took off again accelerating even faster. This triple regression trend acceleration as I call it is common in climax patters. There are three different speeds that occur as the trend gets faster. The first acceleration point starts the strength while the second starts the blow-off top.


With Silver at all time highs and the media talking about all day, all you had to do was watch the price action. As can be seen on the weekly chart, the time came as volume exploded over 10x the avg volume after already moving up more than 100% in past few months. This type of action after a move already occurred usually signals exhaustion, not strength. Moving to the daily charts we can see a high was formed on 4/25/2011 with almost 5x the average volume. This was the first clue that a top may be forming. However, shorting here is suicide as these markets can continue for days before they drop. Two days later we retested that high and our setup occurred.


The "Test of High" point was made on much lower volume than we saw the original high made on a few days earlier (this can be seen on daily and hourly charts). This test immediately failed and came back with much more selling than buying. With a day like the 25th already behind us, and a weekly chart that showed a climactic condition, this is what we were waiting for. I bought ZSL where the red arrow is located expected an 18% drop or so. However sometimes the market gives you much more than you expect. The rules I used to time this trade were very similar to Timothy Ord's rules for buying tests of support and resistance. In his book he goes through detail how watching these levels provides high probability setups with low risk. The best part of the trade was that I was risking a new high in SLV or approximately $0.75 for an 18% move to the downside for a 10:1 trade. With these odds took the trade with a target based on Fibonacci retracements of the accelerated move as well as previous congestion areas as outlined by the orange lines. These areas lined up with the 50 day SMA nicely giving us the green circle for a target. Disclaimer on trade: I am no longer in this trade. I had a tight trailing stop, which hit before my target was reached, due to the volatility of the down move which was completely unexpected to me. For more information on this type of trading, read Timothy Ord's Book: [amazon_link id="047013898X" target="_blank" locale="US" container="" container_class="" ]The Secret Science of Price and Volume: Techniques for Spotting Market Trends, Hot Sectors, and the Best Stocks (Wiley Trading)[/amazon_link]

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