One of my favorite trades over the last couple of months has been the silver market. The silver market has been on fire as of late, and I think it’s starting to attract a lot of attention. It is generally when it starts to attract a lot of attention in the mainstream media that you begin to see a short-term top form.
Looking at the 15 minute chart, it looks rather quiet and as if it’s consolidating for the trading session on Wednesday. This much is true. However, when you look at the daily chart a completely different picture starts to emerge. There are several things to consider at this point as the Silver markets have become so parabolic.
There is a gap below at the $17.50 region that represents the 38.2% Fibonacci level. Typically, futures markets will fill gaps and it is probably only a matter of time before traders try to push it down there. Imagine being a trader who has been long of silver since the $16.00 level. As things stand right now, you are $3.50 up per contract. That is an enormous amount of profit. In fact, it is $17,500 per contract! This is part of what causes major pullbacks, as that very person isn’t wanting to give up too much of the profits, and it is psychologically difficult to hang on to some type of major fall. When you’re watching your profit and loss statement go from $17,500 down to $10,000 over the course of a few days, while it is still a great victory, that is a lot of money to be leaving on the table.
The daily chart suggests that we are getting overdone and a pullback is probably coming rather soon. This isn’t to say that we should be shorting Silver, rather a warning to use newer traders that this type of behavior is indicative of a market top, at least for the short term. In fact, I have no interest in shorting Silver but rather would like the idea of buying it at lower levels after a major shake out. Central banks around the world continue to loosen monetary policy, and that should continue to help precious metals in general.
And then let’s not forget about the US/China trade talks, trouble in Venezuela, trouble in Syria, the Brexit, Hong Kong, and about 5000 other things that I can bring into the fold. In other words, traders are going to be looking for safety.