Target 1 reached on silver (update on gold)

May 11, 2012

The initial profit taking target of the "Descending Triangle" pattern of the daily chart (right hand side below) on silver has been reached. The "Head and Shoulders" pattern on the daily chart is still in play.

Getting stopped out in noise or randomness for trailing a stop for no other reason but to protect a gain would have been brutal. The profit from a swing trade in the descending triangle was good for approximately $11,500 per contract. I discussed "Trade Management" in the last post on silver here: http://scottpluschau.blogspot.com/2012/05/trade-management-in-silver.html

I don't take pride in pointing out patterns "after the fact". Anyone can do that. I do it because these patterns have a history of repeating themselves and I believe looking back at the original posts will be helpful in building up intuition for recognizing them in the future. The original post of the descending triangle "prior" to a breakdown is here: http://scottpluschau.blogspot.com/2012/04/bearish-pattern-of-day-silver.html

The original post on the H&S "prior" to the breakdown is also worth a review and can be found here: http://scottpluschau.blogspot.com/2012/03/silver-approaching-neckline-of-head-and.html

I do not think there is an edge in trading pricing patterns all by themselves. What determines an increase in the probabilities of patterns in my opinin is taking into context the entire auction market process. This includes a complete study of the profile, open interest, price, volume, and the COT reports.

I would truly like to buy silver and gold for the intermediate to long term, but I have seen zero opportunity to do so using my methodology. Perhaps when the H&S pattern is complete in silver there will be a new bullish pattern that develops or a base will build and I can get in to the long side at a lower price. But until then, $34.50 would be a buy point for me at this time.

Why pay $34.50 rather than $29.00? Because if I pay $29, it may take a long time to get to $34.50 including painful mark to market losses. The path of least resistance at this time is lower. If I pay $34.50 I believe there are greater probabilities I will see $50 or more than if I bought today. I can sacrifice $5.00 to increase my odds of making $15.00 in gains on a $34.50 trade. The path of least resistance is higher if it gets above $34.50.

The 30 minute chart left hand side below is a picture of "vertical development". Buying in here using this time frame is guessing/gambling that it reverses.

(Click on chart to expand)

Here is the latest chart on gold. The "Igniter move" off the consolidation triangle was bad news for the bulls. "Measured Rule" target is almost reached. The bulls have their work cut out for them if they want to see $1,650 again.

For those of you who comment that charts don't matter just look at the charts below. I have seen these patterns, (1 hour chart left hand side below, daily chart right hand side below), too many times to count. I believe it is critical to identify the phase of development a market is trading in early enough so that a trade plan and proper risk management can adjust to it in time.