GLD/SLV

This post isn't just for our PM traders, but everyone as it addresses a concept that is very common in the market and can give you an edge in timing short positions and as a matter of fact, the concept can be reversed in timing long positions.

Late last week after SLV and GLD had broken major tops, I started talking about the possibility of them bouncing back toward resistance. This use to be a very common setup in technical analysis, it can be found n technical analysis books that are nearly a century old. Through the late 1990's and early 2000's the set up changed, once a stock broke out, you had less then a 50/50 chance of t pulling back (in this case bouncing toward resistance-but for longs, pulling back to support). Stocks would often just take off after the breakout and you had to just buy them at elevated prices or miss the move. Now once again, the concept of the pullback is common in the market and is why I started talking about these two possibly bouncing last week. Although the general concept is back, it's for different reasons, now it has more to due with shakeouts, creating volatility and volume rebates. It's a bit trickier now and often the pullback or bounces are more extreme then they use to be.

 Here's an example of what I'm talking about with ADM and I didn't cherry pick this stock as an example, it was the first stock on the watchlist I had open. ADM shows us a very important support zone for a major top, which was broken starting in at the left side of the white box. Note the bounce back up to former support (now resistance). It use to be that stocks would stop just below that resistance and head back down, it would make for a low risk/high probability short sale. Now, as I mentioned, the volatility is greater, the shakeout factor is greater and we often see a move above resistance, which fools traders in to thinking that the top is now a failed top and they should go long. This is our new edge, many times that break through resistance is a short lived false breakout and an excellent timing indication for a short position, so we can adapt to Wall Street's new behavior and take advantage of it. This new behavior tends to create even more profitable shorts as the longs who bought are at a loss when ADM drops back below the support/resistance level and creates a snowball effect, sort of the opposite of a short squeeze.

It was this concept that had me thinking GLD/SLV may bounce, I had no technical evidence, just the common  of the market. Since then, some technical evidence has emerged.

GLD

 Here's an important consolidation zone, which failed last week after a false upside breakout. The green box is the target area as of now based on the size of the 3C divergence that is present now.

 You can see the downside changed character around this 50-bar moving average on a 5 min chart, and look at today's volume as price moves above that average.

Here's the 5 min 3C positive divergence, the evidence that emerged yesterday.

SLV

 SLV broke down from a similar pattern.

 And has now moved above the moving average this morning.

 Here's the technical evidence in a 3C positive divergence formed yesterday

And here's a rough target. Although I should warn that 3C may continue to strengthen and the target zone could be higher. In any case, a failed break of this bounce, would set up a higher probability trade with less risk. We'll keep an eye on both for some decent opportunities. The bounce can be traded on the long side, although I would suggest an intraday trailing stop as this week should be quite volatile with the Greek vote coming tomorrow.