Metals Advance and Continue to Show Strength

June 9, 2011 Justin Technical Analysis

Commodities moved higher and today and silver prices were on the advance after several days of trading in a tight range. Traders and investors appear to be encouraged by an improving technical picture and a series of higher lows on the daily chart.

Several respected financial publications have come forward in recent weeks making a strong case for the fundamentals in silver and labeling the recent correction as an excellent opportunity for investors considering building a long-term position in silver. This value theme seems to be catching on as commodity traders have reached the conclusion that the May selloff was driven primarily by a squeeze on margins that forced silver buyers to liquidate long positions they had no intention of selling.

While it is necessary to understand what is driving market sentiment, filtering out the headlines and news reports to focus on the technical picture usually proves to be a more effective trading strategy. With that being said, price action seems to be indicating that the commodities are again ready to attempt another rally. The market held up at the 200 day moving average and has been supported by a rising trend line for nearly a month (dating back to the May 11th low). The 50 day moving average has proven to be an area of considerable resistance as about six attempts to breach it were turned back during the last week in May.

It is important to note that when prices backed away from resistance, they didn’t do so with any authority and stayed within a few dollars of the resistance area. We are now coming to the point where a nice ascending triangle or pennant type formation has emerged. This time however, relative strength has turned upward and the market seems poised to once again make a run at the 50 day moving average.

A breakout to the upside here would leave a considerable amount of room to the upside before any important resistance would come into play.

Entering a long on a close above the 50 day moving average with a stop just below today’s low would provide a very favorable trade from a risk/reward standpoint.

Gold also continues to show strength as well but the silver trade looks more attractive at this point given the amount of room between current levels and the next area of important resistance. Gold on the other hand is already much closer to testing the April high.

For now, one thing is clear; the bull market in commodities is clearly intact and the overall uptrend in precious metals remains in place. As always, carefully selected entry points and well-placed protective stops will be the key to achieving profitable trades.

Traders and investors concerned about margin may want to consider using the ProShares Ultra Silver Fund (AGQ) as a trading vehicle. It provides 200% of the daily performance of silver bullion and as long as you purchase your shares with cash, you will not need to be concerned with CME raising margin requirements. As an added bonus, this is an optionable ticker symbol which can allow for income based strategies such as selling covered calls or straight option purchases to avoid tying up large amounts of trading capital.