Sunday, April 17, 2011

It's never different

We have quite a bit of conviction that there will be a very juicy day-trade/short-term short trade coming up in silver $SI_F.  But to be perfectly honest,  we’re not sure we’ll be able to get off a good risk/reward trade.    There were many smart traders who were completely right in their thinking that the Nasdsaq was in a bubble back in 2000 but lost it all anyway as the top kept getting toppier. Knowing it and Trading it profitably are two different things.  What will help the trade is further extension, the faster we go up, the better.  A gap up on Sunday night and into Monday would certainly be good.   For us to get short (we’d do it via SI_F) we’d need an extension away from the 5 min/ 9 and 20 EMA (daily/weekly are already extended and since we are daytraders we’ll be focusing on the intraday time-frame).
To make a point clear right away — we’re not calling an absolute top in silver.  We have no interest going in that direction.  We’re all about the short-term.  If we short 45 and it goes to 43 and we cover we call that a victory.  If it goes to 47 the next day that’s fine, we got our two points.
We look at the divergence between silver miners (stalling, under highs) and silver commodity (screaming higher, completely parabolic) and we can’t help to think reversion to mean on the commodity.    Take a look at the following charts:
This is an overlay of silver miners via $SIL and the commodity via $SI_F.  We love these type of divergences because they usually foreshadow good trading opportunities.

Here is a silver weekly– textbook parabolic as buyers are hysterical.  Got to get me some silver!   The divergence to us demonstrates speculative fever versus supply and demand.
Unbelievably extended from the base, and outside its Bollinger Bands on every major time-frame.     Not exactly a good risk-reward entry long, even if you are a bull.

We posted this chart a while back — we’d be buyers of SIL on a pull-back to the trendline, currently at 26.

If you are interested in silver, you follow $SLW.   Here’s a recent quote that caught our eye:  ” Smallwood (CEO) pointed out the only drawback right now is that with silver prices rising so fast, miners are reluctant to do deals with Silver Wheaton. They know that if prices run up to $50 US in the near future, they can get a much higher upfront payment for their silver. He is convinced those deals will come once prices stabilize”
Miners holding back and not signing deals?  Again, this type of information often comes near a blow off short term top.   ZeroHedge this weekend posted this article about University of Texas taking physical delivery of  1 BB in gold.   They see it as a “tipping point” in which U of T is the first of what eventually will be many to leave the “fiat” system.   They see the current gold rise as a “dress rehearsal” of what really will come once other funds join in the fun.   Again, this type of fear-mongering for us is closer to a time when you want to be short, than long.
Precious metal bulls have very good arguments on why silver/gold will go higher.  And who knows, maybe it will go up much higher.  But it’s never different.  And new paradigms are much more rare than people think.     Historically speaking it’s rarely a good idea to initiate a position in a trading vehicle that has gone up vertically out of base as much as silver has and is outside of its Bollinger Bands.   We’ll see if this time indeed is any different.