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Silver - Be Long, But Not A New Buyer Up Here


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Sunday  1 May 2011

 There are so many solid reasons for being long silver, and gold, but silver is likely to continue to
outperform gold on a relative basis.  The recent runnup can be attributed to a slew of reasons, all of which
make sense, the politically ludicrous self-destruction of the fiat Federal Reserve Note by the Fed, making
the United States the largest debtor nation in world history which spells out the fate of the country, China
and India buying, among other reasons.  If you are not yet long silver, it could be problematic buying it at
current levels.  The exception to that is if one is buying the physical metal, including gold, and holding.
There are no margin issues for that, for the price of silver is certainly headed higher.

 The note of caution for new, and even recent buyers is the level of risk exposure.  The higher the price of
any commodity, the greater will be the swings.  A recent example is our last purchase effort last week.
[See Silver And The S & P - A Tale Of Two Markets, click on http://bit.ly/lEsnLH, 2nd, 3rd, and 4th charts
with explanations in between.  That trade ended up being a day trade, buying at 45.14 and selling half
at 47 and the other half at 48.  In "normal" times, that would be a good trade for a week.  While price
has remained above the exit level, there are no hindsight regrets of "selling too soon."  The volatility since
has been great...too great for a rational risk/reward context.

 The reason for our note of caution stems from reading the chart over the weekend.  With charts, if you
want to know where a commodity is going, you HAVE to know where it has been.  Last week's activity is
enough to give us pause.  Others may see it differently, of course.  The recent highest volume occurred
last Monday.  That is a huge amount of effort, and what were the results?

 A quick observation of market behavior, first.  Smart money, [controlling market forces], buys bottoms
and sells tops. Consider that axiomatic, for that is where the transfer of risk occurs, from weak hands
into string hands.  Silver is at the old "Hunt Brothers" high, the $50 level.  If we know that smart money
does not buy highs, who would be doing all the volume on the buy side, [Johnny-come-latelys], and who
would be on the other side of the trade?  [You only get one guess!]

 The location of close is under mid-range the bar, 5th from the end.  That tells us sellers were in control,
otherwise the close would be higher that day.  What has happened since?  Four trading days later, the
price of silver has not made a higher high .  The second to last bar on the chart was another rally attempt,
but once again, note the close.  This time, it is on the low of the range, and we see sellers continue to
dominate the day's range at high levels.  Friday's activity, the last bar, is a small range-inside day bar with
a close just above mid-range the bar.  We see that as a lack of demand.  A lack of demand can lead to
sellers taking over.

 The trend in silver is UP, and in an up trend, one wants to be long.  That does not mean it is safe to buy
anywhere.  There has been a concerted effort from some big name Wall Street firms that do not want to
see gold and silver rally, and said firms have been short and choking on their efforts, efforts to keep a lid
on the reckless creating of fiat currency from getting out of hand, which will be inevitable.  Did we mention
Goldman Sachs as one of those Wall Street firms?

 The margin rates on silver have increased, which is normal as prices rise.  What cannot be considered normal would be a 175% margin increase over the CME's recent 9% margin hike.  What firm would do
such a thing, for such a huge increase reduces many trader's ability to participate in the silver market.
It was the firm M F Global that raised silver margins so dramatically.  Wait!  Isn't M F Global headed by
Jon Corzine?  Why yes.  There is more.  Jon Corzine happens to be a former senior partner at, guess
which firm?  That is right, Goldman Sachs.  Small world, and an example of how sometimes "smart"
money gets it wrong.  There are countries that have deeper pockets than some Wall Street firms, and
even the little guy has been buying silver in unprecedented amounts, via the silver Eagle.

 It would be healthy to have a market correction, especially near previous resistance, the $50 level.  Silver
could make another new high, perhaps in a probe to get more late-comers to join in, and then wash out
all the weak-handed buyers in a sharp correction.

 One does not have to have deep pockets like "smart money" buyers to act like them, and that would be
to buy breaks and not buy new highs, especially after an accelerated rally.  A rather simple formula that
seems lost on so many.

 

SIN D 1 May 11



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About the author


Michael Noonan is the driving force behind Edge Trader Plus.  He has been in the futures business for 30 years, functioning primarily in an individual capacity.  He was the research analyst for the largest investment banker in the South, at one time, and he managed money
in the cash bond market for a $5 billion pension fund using Peter Steidlmeyer’s Market Profile.

Proficient in Gann, Elliott Wave, Market Profile, etc, Mr Noonan no longer uses any of those technical procedures.  Instead, his primary focus is on developing market activity, relying solely on the information generated by the market itself, such as the interaction between  price and volume, and how they relate to important price levels in the market structure.  He incorporates proven market principles, such as knowledge of the trend, supply and demand, along with disciplined rules for to find developing high probability trade opportunities.

He can be reached by e-mail at his website: mn@edgetraderplus.com

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