The Importance of the 40 Level in Silver SLV

May 4, 2011: 9:52 AM CST

No doubt you’ve seen the sharp decline (to be fair, after a stellar rally) in Silver (SLV), but right now, traders are anxiously watching the critical defining level at $41 in Silver Futures and $40 in SLV.

Why?

Let’s take a look, starting with Silver Futures (@SI):

Keeping the chart as simple as possible, the $41 price point in Silver represents a key turning point in structure.

As of this moment (above the 38.2% Fibonacci Retracement and rising trendline), the down-move in Silver is called a “Simple Retracement.”

In the context of rising uptrends, markets advance and decline, with the advancing swings lasting longer and rising in price higher than the declining (falling) swings which are shorter in time and smaller in price swing.

That’s your basic definition of an uptrend (beyond higher highs and higher lows).

Adding a layer of complexity, retracement phases generally find support either at the 38.2% or 50.0% Fibonacci retracement levels (using your standard Fibonacci tool from a swing low to swing high).

Deep retracements can do as far as 61.8% before resuming the uptrend, but anything that breaks 61.8% in many cases is a signal that we’re dealing with a reversal (that will break under the swing low where you started the Fibonacci grid) or alternately a “really deep” retracement that could end perhaps with a double bottom pattern.

Anyway – what bullish Silver traders want to see happen is the critical $40 level hold which would classify this swing officially as a “retracement in an uptrend” and the bullish party would continue.

Bearish silver traders want the opposite to happen, and would likely short (or add to positions) on a breakdown under the critical support zone at $41.

Beyond the 38.2% Fibonacci reference level, we have the simple rising trendline as drawn and a little ‘resistance’ pivot price support from mid-April (as I highlighted).

Opinions don’t matter – price matters.

Either silver breaks down under this critical confluence (causing bulls to liquidate/sell further) or it rallies up off it.

That’s the logic of trading at an inflection point – you get the benefit of a tight stop if price does the opposite of what you expect it to at the pivot price.

The structure is very similar in the widely traded SLV ETF:

The logic holds in SLV, only the 38.2% retracement is $40 instead of $41 as in the futures contract as drawn.

So what are the IF/THEN  short-term logic parameters now?

IF $40/$41 holds, then we classify this as a simple retracement – though you might want to wait for proof of the level holding before buying into such a big sell-off into support.

And the alternate:

IF $40 fails to hold as a support level, then expect a possible retest of the $37 level in SLV (prior price resistance cluster from March and the 50% Retracement) and the $38 level in the @SI Futures (same logic).

A bullish bounce off the $37/$38 confluence support STILL calls the move down a “retracement in the context of an uptrend.”

However, if price falls under that next downside target zone, we start to bend our definition of “retracement” in favor if “really deep retracement” or early “reversal,” which would be triggered on the breakdown under the 61.8% level at the $35 region.

Keep these objective price levels as a reference as new data emerge each day, and do be careful (as I wrote in the “How to Adjust to the High ATR in Silver” post).

Corey Rosenbloom, CMT
Afraid to Trade.com

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9 Comments

9 Responses to “The Importance of the 40 Level in Silver SLV”

  1. chaunceyherbie Says:

    The parabolia shadow knows about outlier price and musical chairs 😉

  2. Corey Rosenbloom, CMT Says:

    Haha I totally agree.

    I've shown in prior posts what happens when parabolic arc trend lines like these get broken. I'll try to do a parabola post in the next few days perhaps.

  3. chaunceyherbie Says:

    I look forward to your post, Corey. Keep up the good work. It is appreciated by your readers.

    Here is my Linear Regression view (just one of many perspectives).

    http://screencast.com/t/7Df17a

  4. Dan de Man Says:

    Odds favor a short squeeze tom (to punish the late dumb money) as we are short term oversold and have 4 down days in a row. Nothing ever goes straight down…

  5. Dan de Man Says:

    We are also on the 50ema, a logical spot for buyers to come in…

  6. Minion Says:

    Any Elliot Wave users will note the extended five in the last leg up, which itself was a three. Just like the textbook shows, the correction is massive!

  7. chaunceyherbie Says:

    Wowzir.
    The pre-market SLV selling to volume to 14M, or 50% of the 20MA volume from one month ago. Increased margin requirements and a large Mexican silver miner selling hedge yesterday is adding gasoline to the fire it seems. The price to get of the SLV door is going lower this morning on massive volume.

  8. chaunceyherbie Says:

    Corey, in looking at the 280 day chart (not to mention the negative fundamentals re. resetting margin limits and concomitant margin calls, as well as the psychological, visceral selling of those trapped-some still profitable, others with staggering losses), I ask myself is SLV cheap in here? My answer is no, fwiw. Technically, I don't think corrections of hyper-parabolic moves end on their first leg down. What think you?

  9. Dianabol Says:

    what industries actually use silver ?
    dianabol