PRECIOUS METALS RESUME UPTREND BUT STILL LOOK OVER-EXTENDED -- THIS WEEK'S LOW HAS PROVIDED A NEW SUPPORT LEVEL FOR STOPLOSS PROTECTION -- APPLYING PARABOLIC SIGNALS TO SILVER AND GOLD
SILVER PROVIDES NEW SUPPORT POINT... My Tuesday message expressed concern that Monday's high-volume day might have marked a short-term top for silver, and precious metals in general. Those concerns about silver being dangerously over-extended remain. However, renewed weakness in the U.S. Dollar, and Mr. Bernanke's statement yesterday that the Fed remains unconcerned about commodity inflation and doesn't intend to do anything about it, gave a green light to metals traders who took some profits earlier in the week to jump back in again. The daily bars in Chart 1 show Silver iShares (SLV) hitting a new 31-year high today after yesterday's high-volume up day. I do remain concerned that silver might encounter profit-taking around its 1980 peak near $50. Today's new high, however, has kept its uptrend intact (at least for now). One positive aspect of Tuesday's price pullback is that it gives traders a new support level to protect against. Every time a market in an uptrend pulls back and then turns back up again, a new support level is created. That allows traders to raise their "stoploss" levels. The daily bars in Chart 2 show rising support levels since mid-March to be at 33.01, 35.74, and 38.73. This week's pullback has created a newer support level at 43.55. Traders can now raise their stoploss level to just below that higher level. Other traders wait for a moving average line to be broken before exiting a rising trend. The 50-day average (blue line), however, is currently 23% below today's price which is too far away to be helpful. The green 20-day average should be more helpful but would require giving back 14% from today's price. In a market like silver which is enjoying a parabolic rise, there's a more sensitive indicator that can be used to advantage. Appropriately, it's called Parabolic (SAR). Let's apply it to the silver market.
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Chart 1
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Chart 2
APPLYING PARABOLIC TO SILVER ISHARES ... Chart 3 applies Parabolic (SAR) dots to Silver iShares. [You can find Parabolic in the same overlay list that starts with moving averages]. The main feature of the Parabolic dots is they hug a market uptrend very closely, much more closely than moving averages. When the dots are below a rising market, they represent stopout points (or exit points). In other words, a short-term sell signal is given when a dot below the price action is hit. The sensitivity of the Parabolic dots has good and bad points. The good point is that is allows for exit signals much earlier. The bad point is that those signal are sometimes too early in the trend. That's offset, however, by the fact that it quickly switches back to a buy signal (when a higher dot is hit). That makes the Parabolic system better for short-term traders. In my view, it's especially useful in a market like silver that has risen so steeply. The last short-term buy signal in the SLV took place on March 22 near 36. Right now, the SLV would have to drop to 43.55 to signal some profit-taking. That new Parabolic level happens to coincide with this week's reaction low.
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Chart 3
COMBINING ADX WITH PARABOLICS ... The (SAR) part of the Parabolic title stands for "SELL AND REVERSE". That was the intention of its inventor, Welles Wilder. In other words, exit your long position and "sell short". I don't, however, recommend using it in that fashion. It's much too sensitive and results in trading against an existing trend. One of the ways to avoid doing that is to employ a companion indicator developed by Wilder called "Wilder's DMI (ADX)". [You can find that in the lower part of the Indicator list]. The red and green lines below Chart 4 represent buying and selling pressure based on the last 14 days of trading. A rising trend is signaled when the green +DI line crosses above the red -DI line. That last happened at the start of February and is still positive (see green box). During that period, two "sell" signals were triggered by the Parabolic dots (see red circles). The fact that the DI lines were positive, however, argued against any "short selling". In other words, you can use the Parabolic dots for short-term entry and exit points, but make sure all of your trades are in the direction of the DI lines. The black line below Chart 4 is the ADX line (which stands for Average Directional Movement). The ADX is essentially a smoothed difference between the red and green lines. A rising ADX line signals that a strong trend is in place which has been the case for three months. A short-term caution signal is given, however, when the ADX line rises above the other two lines (which it has just done). That signals that the uptrend is stretched too far. A downturn in the ADX line, however, is needed to signal that a short-term top is in place. A more important profit-taking signal is given when the last Parabolic dot is hit.
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Chart 4
WEEKLY AND MONTHLY PARABOLIC... Another way to filter short-term buy and sell signals is to employ Parabolic dots on weekly and monthly charts. Their signals are less frequent and last longer. Weekly and monthly signals are also more appropriate for longer-term investors. The weekly dots in Chart 7 show three new buy signals in the Silver iShares (SLV) since the start of 2010 marked by blue arrows. That last buy signal took place during the first week in February near 30. It's been positive for the last 12 weeks. The red circles show two periods when the SLV moved sideways or slightly down. The monthly signals are even more impressive. The last monthly buy signal (blue arrow) was given in June of 2009 and has been positive for the last 23 months.
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Chart 5
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Chart 6
PARABOLIC GOLD... The same Parabolic signals apply to gold. The monthly bars in Chart 7 show the GLD Trust (GLD) in a major uptrend since the start of 2009 (see circle). The GLD would have to drop to 129 to issue a major sell signal (see arrow). Chart 8 gives a look at more recent short-term signals. The last buy was given on March 21 near 140 (see circle). A drop to 145 (arrow) is needed to give a short-term profit-taking signal. Since I remain bearish on the direction of the US Dollar, I also remain bullish on the major trend of precious metals. I'm just concerned that silver in particular is stretched too far and is approaching its all-time in that over-extended state. I also remain concerned about the fact that precious metal shares are lagging too far behind the metals. That suggests that the latter are probably stretched too far. That being the case, extra vigilance is needed to protect against a much-needed pullback. That's especially true for those with a shorter time horizon.
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Chart 7
