Thursday, April 26, 2012

Bull Hammer in Silver

There was some major downside price rejection yesterday in Silver which can be seen clearly in the bull "Hammer" daily candlestick pattern.  This should make the bears think twice about their prospects.   There is potential here for a near term change in trend, but it is important to remember Japanese Candlestick patterns are useless without confirmation. 

The problem for the bulls is silver is still trading beneath the breakdown point in the "Descending Triangle".  This is now a minor resistance area.  The way things look right now, trading to the long side with my methodology would have a "negative expectancy".  I have no issues watching silver go up today and have zero participation.  I discussed the forming of the descending triangle pattern here:  http://scottpluschau.blogspot.com/2012/04/bearish-pattern-of-day-silver.html

If traders like to trade silver only from the long side, they can look at yesterday's price action and claim this was a manipulative takedown when the Fed announcement came, or they could have taken an objective view of the price action sitting on the sideline due to the structure of the daily chart.  Also, putting a position on just prior to any major market moving announcement is simply gambling in my opinion.   

What to do now?  Any bearish setups in the smaller degree timeframe and I will look to trade on the short side until the descending triangle pattern has failed or a reversal pattern negates it.  The way the silver bulls have been hanging so tough lately, there is a legitimate reason to be cautious trading on the short side.  I believe the aggressive play will be on the long side, but not yet.  I am still of the strong belief that silver needs to get above $34.50 to even consider holding a long position.  That may seem like it is a long way away and in contrast to the contrarian view, but I am no bottom picker and I don't look for bargains.  "Price" should mean absolutely nothing to a trader.  

(Click on chart to expand)


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8 comments:

  1. "Price" should mean absolutely nothing to a trader."

    True words of wisdom Scott....I concur 100%. Keep up the good work and let us know when we can pay you.

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  2. Thanks Chris. Although I wish you didn't bring up the subscription. I have gotten a lot of email asking about when things are going to start. One of these days.

    I will continue to update the subscription tab.

    Scott

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  3. Hi Scott,

    is the head and shoulders 'measured rule' still in play on the daily chart?

    Thanks

    Tryst

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    1. Thanks for the comment Tryst.

      Yes the "H&S" is still in play in my opinion. Why is it in play still? Because my target has not been reached, the trade idea has not been invalidated by the stop loss being executed, or the auction has not changed by a seperate or new reliable reversal pattern.

      The new "descending triangle" pattern does allows me to trail the stop on the H&S. If you look at the above chart, I used an X for my stop placement. The H&S is about a breakeven trade now worst case scenario barring any gigantic gaps.

      Scott

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  4. Thanks, for replying Scott.

    From your previous comments, I take it your methodology does not take into account potential strong support areas in terms of round numbers (i.e. in silvers instance, 30$ can be 'perceived' to be a strong support area, which, if you went from last weeks action, it was as it bounced quite strongly off it when it was breached momentarily).

    The head and shoulders trade would have to break through this strong support level to validate itself.

    Thanks

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    1. Your welcome. The short answer is a bearish pattern that breaks down below support as opposed to above it would have greater probabilities. That is a great observation about the $30 level being psychologically important, which is a round number support area no question.

      Adjusting for lower probabilities on a trade that still has a "positive expectancy" means reducing position sizing. This is not an entry/exit or "Risk Management" answer (the stop loss doesn't change) but rather falls under the topic of "Money Management". What is aggressive, moderate, or conservative is all relative in the eyes of the one who develops a trading methodology, but money management is essential and should be factored into all trades.

      Thanks as always for the very intelligent comments/questions Tryst. I appreciate your participation. I hope my answers help.

      Scott

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  5. Thanks for the reply, Scott. You statement on it be related to money management makes sense.

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