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Understanding Silver Futures-A Chart Analysis

Understanding Silver Futures-A Chart Analysis
March 12
20:43 2012

The Chart

Here is a weekly chart snapshot of Silver futures (Symbol: SI) ranging from March 2010 to February 2012. This chart includes several technical indicators:
• 8 period simple moving average (blue line)
• 20 period simple moving average (red line)
• 200 period simple moving average (yellow line)
• Bollinger Bands (purple lines)
• Relative Strength Index (RSI) (dotted line)
• Volume (dark blue bars)


The Walkthrough

This article will focus on identifying the difference between beginning uptrends, downtrends and pullbacks. From March 2010 to August 2010 Silver futures is trading in a sideways pattern within a range of 15.00 to 20.00. Within this range there is not much price movement and the moving averages are all pretty tight. The price is also making higher lows within this range.
It is also important to note that the price remains above the 200 period moving average, an area that signifies major support.

The first signal of a breakout to the upside occurs in the area highlighted in the yellow circle. On August 23rd, 2010 the price of Silver finds support at the 8 and the 20 period simple moving averages and continues making new highs. The price continues upward until it extends outside of the top Bollinger Band and later pulls back into the moving averages only to find support again and continue up, making a new high at 49.82. The area highlighted in the orange circle highlights the end of the uptrend on May 2nd, 2011. The market makes a sharp turn to the downside.

Simple enough, right? Looking a little further, one should realize that there are many types of uptrends. Some uptrends ignite with big green candles while others produce small to medium size candles with very little pullback. But on this chart, the uptrend is a series of small green candles that grind up, until making a pullback. In the uptrend, the red candle pullbacks are about the same size as the green candles and the bulls out weight the bears but not by much. The trend then tops out and begins a sharp move downward.

This downtrend erases more than 50% of the prior wave up, signifying that this is not just a pullback but the beginning of a new trend. The red candle on May 2nd, 2011 completely erases the previous 6 green candles. This large spike down should never be taken as a merely a pullback. After seeing a large red candle like this, the trader should then look to see if the market will continue breaking below key support areas such as the 20 period simple moving average. On this chart we see that the market initially failed to break the 20 period simple moving average, but instead pullbacks but never makes an new high. Then on August 19th, 2011 the price collapses again and breaks the 20 period simple moving average but never quite reaches the 200 period simple moving average.

The Lesson

It should be every trader’s top priority to better understand trends and how they are not all equal. Some trends offer more safety than others and the key to understanding this is to pay attention to the candles going in the direction of the trend, particularly size, wicks, and the number of consecutive candles. Pullbacks should never erase more than the last two previous candles of the trend. The better the trader can identify the trend the better the trader can manage the risk associated with trading any given market.

In uptrends that grind up, look for an even bigger fall as this type of uptrend is mostly driven by speculation. In the case of Silver, margin requirements were raised in April 2011 which made it harder for smaller investors to maintain larger positions and made the price of Silver unsustainable at elevated levels.

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