Look at these ETF Charts SLV ZSL Before Calling a Top in Silver

Apr 21, 2011: 10:40 AM CST

Are you trying to call a top in silver?

You’re not alone – I’ve been picking up on a lot of chatter in the blog (and email) world about traders and analysts trying to call that proverbial “top” in Silver “any day now.”

Before you can’t fight the temptation any longer, at least take a look at these four charts – Two Daily and Two Weekly – of major Silver ETFs SLV (bullish) and ZSL (ultra-bearish).

Let’s start with SLV Weekly for our reference:

In this post, I’ll specifically be focusing on a few key chart points:

1.  Bernanke’s “Jackson Hole” Speech that introduced us to QE2 on August 27, 2010
2.  The “Weekly Pullback” to the 20 EMA in January 2011
3.  Volume and Momentum Insights

I need not remind you that Bernanke’s QE2 speech (“We will do anything to prevent a second recession”) helped kick-off the inflationary commodity rally we’re seeing now – but that’s completely another story.

Second, the “Weekly Pullback” in January was an interesting topic, as the daily chart (as you’ll see) had plenty of warning signs of a potential “top” and “reversal” that was shortable … but wound up being nothing more than a clean and easy pullback (retracement) to the rising 20 week EMA – an intermediate term BUY signal.

In terms of momentum and volume, we’re seeing CONFIRMATIONS from both instead of negative divergences on both the weekly and daily frame – that is a sign of likely price continuation.

Now let’s flip down to the daily chart:

Again, we can see the “Blast-off” in price at the end of August which coincided with Mr. Bernanke’s QE2 announcement (which would begin officially in November, though markets tend to move ahead/in advance of actual events).

The MAIN IDEA with the daily chart is what happened in the run-up to January 2011.

Generally, if you’re going to call a top, it’s best to wait for confirming signals of potential trend reversal.

These include lengthy negative divergences in both volume and momentum (which were present as shown) and then triggers from price in the form of breakdowns under rising price trendlines (hand-drawn) or moving averages (such as the 20 or 50 day EMAs as shown above).

So, if you’re going to call tops, it’s best to wait for triggers that form AFTER divergences or some other non-confirmation are present.

Even with all that bearish wind at traders backs, SLV (silver) did not reverse, but instead just pulled back to the rising 20 week EMA (higher timeframe support) and launched up from there.

This is a key point in Multiple Timeframe Analysis – wherein the daily (or short-term) chart can signal a clean reversal… which turns out to be nothing more than a standard pullback on the Weekly (higher) frame.

Anyway, with Silver shaking off that potential reversal signal in January, the next BUY signal came on the breakout to new highs in February above $30 per share (roughly $3.00 per ounce).

I’ve posted many times that the two leading trading strategies in strongly up-trending markets are retracements to rising EMAs/Trendlines or price Breakouts to new chart highs.

What we’re seeing now is the remainder of the current rally which – again – is confirmed with bullish surges in volume and momentum – these are things you do not use as bearish short-sell catalysts.

A main point from the current chart is that, while there is not a corresponding buy signal (as in, no breakouts above pre-existing resistance and of course no pullback to support), there is – as of this moment – NOT a bearish short-sell signal (given that price is rising and overextended… but overextension alone is not a reason to short).

Now, let’s flip the tables and move away from the Bullish SLV chart to the Ultra-Short ETF – ZSL:

Before getting too deep into the chart, keep in mind ProShares announced a 10 to 1 Reverse Split for ZSL on April 14th, 2010.

The long-term fate of leveraged inverse ETFs almost always means a trajectory headed to $0 per share … which is why they will have to CONTINUE reverse-splitting most leveraged inverse ETFs every few years (particularly if there are strong rallies in the underlying market) … but that too is another story.

I’m really showing this chart for comparison purposes, and as a reminder that double or triple leveraged inverse ETFs are for very short-term (perhaps only intraday) trading purposes – you should not invest long-term in leveraged inverse ETFs.

The main point of this chart is the literal surge in volume in 2011 – which one would assume is a rush of risky/aggressive traders seeking to profit from a potential top in silver.

So far, that has been a losing bet, as seen from the daily chart:

Again, I’m just going to focus on a few things.

First, when Bernanke announced the initial QE2 plans in August 2010, ZSL sold for $140 per share.  Today, it’s at $15 per share.  That’s a 90% decline and – mark my words – ZSL will NEVER see $140 per share again (without a reverse split).

Let’s assume silver fell from $40 per ounce to $20 per ounce – a 50% decline.

One would thus assume the ZSL – a double-leveraged inverse fund – would increase 100% which is an enviable gain.

$15 per share times two (increased 100%) is $30 per share.

Oops.  While your position dollar value did double, $30 per share is no where near $100 per share seen in September.  Price will not make it back there.

Anyway – again this topic is a huge issue for another conversation, but it underscores the importance of reading an ETF’s prospectus (and doing your research) carefully before purchasing an ETF.

Moving on – the surge in volume from March to present either indicates that more people are now aware of the ZSL fund… or that more people are finding shares just too irresistable to snatch up a position that will rally a large percentage gain (but NOT large share price gain – certainly NOT back to $140 per share or even $100 per share) in the event Silver does top soon.

Now going back to the main point – our weekly pullback phase in January (when it looked like Silver had topped on the daily chart) led to a ZSL move from $40 to $50 per ounce (a 25% gain) but now price is 70% lower ($50 to $15) and still declining.

To make a long story short, any type of trend reversal strategy is inherently more risky than playing for trend following strategies – given the foundation of technical analysis is built on the notion of trend continuity.

Martin Pring (Technical Analysis Explained) defines Technical Analysis as:

“The Art of identifying a trend at its earliest stages and riding that trend [trading in the direction of the trend] until the weight of the evidence proves that the trend has reversed.”

To me, “weight of the evidence” takes into account a variety of factors including sentiment, momentum, volume, trendlines, moving averages, reversal candles, exhaustion gaps, and many more concepts/indicators.

Right now, we’re seeing “price overextended” (a vague term) and high bullish sentiment.  That’s not the weight of the evidence.

We’re NOT seeing divergences, trendline breakdowns, EMA breakdowns, etc.  It would be much safer to short silver if we started to see some of those… but even then we DID see those in January 2011 that was nothing more than a weekly chart pullback ahead of the recent rally from $30 to $45.

One of technicians’ favorite saying is the well-known:

“A market can remain irrational longer than you (your account) can remain solvent” along with

“Trends tend to go higher (or lower) than almost anyone thinks they can go.”

So until we start seeing some material chart evidence of a reversal according to the “weight of the evidence” model, it’s probably a good idea to resist the urge to be a hero and call a top in this powerful metal until we see some objective sort of sign of reversal other than “it’s really expensive and overextended.”

Unless you’re required to trade Silver, there’s probably better reward/risk opportunities elsewhere.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  • Porky pig

    Hi Corey - Just found your article today (10/18/2013). Wow! That was indeed the top back in April. Excellent work, and you have a new follower!

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