Silver Reverses On High Volume, Dow:Gold Setting Up For A Fall

Silver opened higher and made new 30 year highs intraday before reversing this afternoon and finishing down $.69 with high volume on SLV. This movement marks a short term top and the beginning of the first swing to the downside since the beginning of March. After an 8 day winning streak and only trading lower 3 out of the last 14 days, silver should finally stop to catch a breather for the remainder of the week.

Trading volume on SLV was almost 78 million and 2x above 50 day average. The candlestick on the daily chart is an engulfing candle, though not quite a key reversal as the close was not lower than friday’s lows. The catalyst is said to be one trader who bet roughly $1million on a Jul 11 $25 SLV put which sent the ETF and the rest of the silver market (and gold for that matter) crashing down to yesterday’s lows.

I have warned of the overbought nature of silver and though one could argue that silver wouldn’t have topped out today if it weren’t for the incident listed above, the fact remains that the incident above likely was an effect, not the cause of the reversal we saw today. When there are too many bulls and not enough bears, you get sharp and volatile reversals that catches dumb money by surprise.

I’ll follow up my analysis once again with the chart of First Majestic Silver (AG) :

I warned on the 4th of this month to start putting in hedges against AG longs. On the 6th, Ag reversed on record volume and after today it has broken the parabolic trend going back to the middle of March. This is a great company to own stock in but it’s poised to move lower in the near term.

As far as how low SLV can consolidate to here, it appears that the 20 Day MA will add support somewhere above $38 within the next couple of days and there is also support at $37 and $35. It can be difficult to speculate the momentum that silver will have next so I don’t have an opinion on which support level is most likely to be tested. However, when it does bottom, it should be clear and concise.

One more thing I’d like to point your attention to is the Dow to gold ratio. It appears to be in a situation where gold is on the brink of a breakout versus the dow.

Throughout late 2008 to early 2010, there was a pivot point at 10:1. It rallied to 10 once in August ’09 and again in March ’10, creating a double top. It then made a series of higher lows before the trend broke down in April and gold moved $100 higher as the ratio fell.

Zooming in to the past year, we can see a similar setup is forming. Resistance is at 9:1 which was formerly support from March ’09 to April ’10, has been tested twice and rejected – a double top just like before. Now there is a series of higher lows and the index is sitting just above trendline support at 8.4:1. If this trend breaks down and makes new lows, it could mean the next leg in the gold bull market has started as money moves out of stocks and into gold and other hard assets. Of course this is nothing to hold your breath for, but it is certainly something to watch as we come closer to the end of QE.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

6 Responses to Silver Reverses On High Volume, Dow:Gold Setting Up For A Fall

  1. Jason Burack says:

    The end of QE II, but QE III is on the way!

    • aaronbasile says:

      They won’t want to call it QE II though… maybe they can call it “quantitative Keynesing”….

  2. Aaron says:

    Qualitative Keynesing? *shudders!* hahaha… Ahhh, they can devalue the dollar all they want. I just won’t own dollars, and will own precious metals and Swiss Francs. Think I’m going to harbor some $100K savings account in USD? Not a chance! ;-)

    Love the blog though, bro. It’s nice to find another trader who likes the same space and knows what he’s talking about. You’ll definitely see me pop my head in now and again, and thanks for the comment!

  3. Aaron says:

    Thought I’d also mention my thoughts on the supposed million dollar $25 put someone bought. Big bet, yes. But I sort of doubt they’re really shooting for it to end up in-the-money. With this little pullback in silver (not sure of exact price on SLV), they’ve probably already made a significant profit…and if they get silver a little lower, those contracts will surge in value. I currently don’t trade options in my account, but I’ve been trading them in a simulated account, and make significant profits by flipping out-of-the-money contracts. So I kinda feel like it’s a shrewd options trader with a boatload of cash and leverage who’s trying to possibly double-up. Who knows though…maybe whoever it was really feels it will strike. I’d just have to disagree.

    • aaronbasile says:

      Yeah they can make money off of that call with silver only dropping a few dollars, the call alone was enough to shake the market and it was a risky bet that likely paid off for them but I seriously doubt they plan to hold it to expiration. Trading with a simulated account is good for practice. I still manage simulated accounts that I used for practice before I first started actually investing. You should apply for level 1 and 2 options trading if you think you have enough expierience.

      • Aaron says:

        Yep, I just haven’t filled out the forms and submitted them yet. So busy every day that I’ve been procrastinating….

        Anyways, what’d you think of today’s session? I called it right about silver moving up again…but EXK didn’t give me the performance I wanted, unfortunately. I should have sold at the day’s high of $11.64, then loaded up again when it slumped. I’ve been whining about it all day, lol! AG was up nearly 12% though… wish I’d had my money there! I think tomorrow can be a stronger day though. Silver has gotten back towards the day highs after-hours, and I’m hoping it can pop again tomorrow around noon, and let me sell into some strength… then we buy on the next fearful pullback, and do it again…

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