Market Anthropology: Trade like Peyton

Thursday, May 5, 2011

Trade like Peyton

Another day, another decline for silver – another margin hike by the CME. 

This is what the back side of a parabolic commodity market feels like. It’s reinforcing, violent and often temperamental. Just as you think the market is stabilizing, the ground falls out and the next level of support comes into view faster than my 7th month old devours a sliver of cantaloupe (he’s advanced – we’re very proud). It is why I reasoned just last Thursday when the market was sitting directly below the magic level of $50 an ounce that we could see SLV at $32 in the not too distant future. 

Needless to say many were skeptical. 

Before I jump the shark and get ahead of myself (there’s typically an inverse performance relationship to hubris) , there’s a logic behind the seemingly outrageous expectations I had for silver last week. Once the price structure failed as it did on the 26th, I knew the momentum engine was starting to cough itself out. Couple that with an ADX (strength of trend) above 60 and a closing directional spread and you could have reasonably inferred that a top was imminent. Once silver failed to take out the historic highs from 1980 – its fate was sealed. 

The next order of business was near term targets. On Sunday night I came up with these. 

By reviewing the pullbacks for silver over the past two cycles in 2008 and 2006, you will find proportional moves to the one we are currently experiencing. Specifically, I focused on 2008.

What makes this move special is the backdrop in which it is playing out against (exhaustive dollar lows) and the magnitude and velocity of gains it had going in. 

The market’s kinetic energy is merely translated from the pivot.

It should make for interesting trading going forward. The market only follows the script for so long before it calls an audible. Best make like Peyton and avoid the sack.  

Stay frosty traders.