Gold and silver are in the cross hairs of Guest Trader Máté Varga-Háli
Part two of Mate's three posts this week and the shiny stuff and US Treasuries is the topic today. You can catch up with his first post here: From risk to reality
XAG/USD BUY - PENDING BUY
Silver and gold are not in their best form lately, both commodities depreciated significantly in the last two months. Although, there is a big fuss about gold as usual, silver seems to be neglected a bit. As XAG/USD approaches a very significant long term bull trend-line and a strong support zone, I think it is high-time to have a look at the possible low risk entry points.
FUNDAMENTAL CORRELATIONS
For me, commodity pricing is one of the toughest tasks when it comes to price analysis. The value of these instruments are influenced by so many factors that I do not feel self-confident when trying to look at gold and silver price movements using my conventional analysis tools. Instead of trying to estimate the level of future demand and supply, I pay much more attention to intermarket correlations.
Long story short: gold and silver prices are highly correlated. Gold prices are also highly correlated to the real 10-year US government bond yields.
In case of silver, my approach looks like this:
1)What do the technicals say?
2)What does the real 10-year Gov bond yield say?
3)What do market conditions tell?
TECHNICALS
XAG/USD WEEKLY CHART
Looking at the long-term silver weekly chart, it becomes evident that the 3.5 year long downside shift may about to reach a significant support zone located at 14.60 - 15.70 soon.
Support zone confluences
1)12 year long bull trend line (green line)
2)The zone between 14.60 - 15.70 functioned as significant support/resistance zone in the past (horizontal white lines)
3)The 76,4% Fibo retracement level of the all the time range is @ 15.15
XAU/USD DAILY CHART
Silver price movements are determined by a falling wedge in the last 1.5 year. The support zone identified on the weekly chart and the support line of the falling wedge should give buyers the signal that a reversal may be on its way. I believe that more aggressive traders have already a lot of pending buys open around 15.50. Since volatility is picking up lately in all asset classes, I adjust my trading strategy accordingly and take less risk when it comes to position sizing and determining low risk entry points. I rather miss opportunities than to risk my capital.
Recent price movements of different asset classes suggest that the markets tend to behave more irrational than usually. Price movements can extend in either direction more than expected causing a lot of stops activated.
Zooming in the daily:
1)XAU/USD moves in a falling wedge
2)Is near to the top of the weekly support zone
3)The candle in the white rectangle supports my idea that silver also might be inclined to aggressive price movements
All in all, my bet is that entering into a position in the green rectangle is validated and can offer nice returns over the short and medium run.
10-YEAR US GOV BOND YIELD
The 10-year US yield correlates strongly with gold prices and so with silver prices. Right now, the market expects the FED to raise rates around mind-2015 or a bit later. Looking at historical data, I believe that raising rates actually will have a negative effect on 10-year yields, at least at the beginning. Raising the FED rates and falling 10-year yield might seem to be controversial. Classic economic theory promotes that higher 'risk free' yields have a negative influence on stock prices, lower stock prices turn on risk off sentiment and so traders and investors usually turn to safer assets like the 10-year US gov. bonds. Turning to US bonds also means shrinking bond yields, which actually results in the appreciation of gold and silver. This is the theory.
The chart of the 10-year yield does not contradict my idea about the downtrend.
MARKET CONDITIONS
COT positioning does not seem to be very accommodative for bulls at recent price levels. Large speculators and commercials positioning topped at the end of January 2015 and since then the bull conviction decreases steadily. In addition, small speculators try to pick a bottom and started to increase their long exposure. Small speculators are usually on the wrong side of the market when it comes to trend reversals. This tells me that buying around 15.50 might be too soon, I have to be patient and let my entry level play out.
TRADING STRATEGY
Buy : 14.60/80
Stop : 13.90
Limit : 16.50
Risk/reward: 2.3
If you would like to take part in Guest Trader then please email rlittlestone(at)forexlive(dot)com, and as per the comments yesterday we'd really like to see some of you ladies having a go. Everyone is welcome to the madhouse
