Confluence Archives | Opportunity Identified

May 14, 2015 | Posted by David Zarling, Head of Investment Research

Silver: It’s Time

When we look for low risk / high reward entries in any investment, we need to be patient, waiting for those times where our risk and reward are well defined. Way back in November, we told you about an upcoming opportunity in Silver. Using cycles, we were looking for a low sometime between November and February along with a downside target near 14.00. Here’s the chart from back in November.

(click to enlarge)

How do we look today?

Price didn’t quite reach 14.00, but we’re not picky. We’re seeing a nice base with lows near our expected cycle low. In addition, we’re seeing price breakout from a 2.5 year downward trendline (dashed green line) and overhead resistance (supply) near 16.50. Adding evidence to our low risk entry is the beautiful divergence in momentum, making higher lows while price makes even lows. This is a significant move with well defined risk. Let’s zoom in and get tactical.

As you can see, the breakout breaches two significant areas of resistance. From a risk management standpoint, we have no reason to own it below 16.20. Our initial upward target is 18ish, but we will be watching price action closely if/when it reaches the solid green downward trendline, which has been significant resistance dating back to the 2011 top in this industrial metal. If that trendline is broken, we could have a rip-your-face-off rally. But let’s not get ahead of price. Let’s let it show us what to do. Trade safe.

Disclosure: The author is long SLV.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions.

November 1, 2014 | Posted by David Zarling, Head of Investment Research

Silver Linings Playbook

Since April, 2011, Silver has been getting crushed. When I say crushed, I mean it. Down over 65%, this precious/industrial commodity has been a wasteland for those hoping it would increase in price. We don’t fight price. Price is the manifestation of opinion and final arbiter of value. Price knows more than we do. We simply identify opportunities. And Silver, curious investor, may be approaching the best investment opportunity of the next decade. But let’s not get ahead of ourselves. There’s likely more downside to come. Between Thursday and Friday, Silver (represented here by SLV, the Silver ETF), continued its relentless downtrend – down another 7%.

We have some targets identified where a bottom in Silver seems logical. See the chart below (click it to embiggen). At first, it may seem a little confusing, but it’s really quite simple. Price moves to equilibrium. The orange annotations mark two measured moves (from the 2011-2013 broken descending triangle and from the 2013-2014 broken descending triangle). Those two measured moves end up within 10 cents of each other. We don’t get picky. The 13.50 – 14.00 range should provide stiff resistance to any further downside pressure. Assisting this logical turning point, is the downward trendline in green. And to help us in timing any potential bottom are some very accurate cycles (annotated in purple). Focus your eyes on only the cycles, you’ll notice they align with many minor and major turning points. Adding everything up, we are going to be looking for a major low in Silver sometime between now and February, 2015. Our price target is between 13.50 – 14.00. Once we reach that level, we’ll be looking for evidence of a change of direction. If/when that happens, I’ll let you know and share with you why this could a be major opportunity.

October 28, 2014 | Posted by David Zarling, Head of Investment Research

Levels Recaptured. Now What?

Back on October 17th, we found reasons for an immediate bottom (which turned out to be an accurate assessment). And on October 19th, we identified some levels in common indexes that would allow us to hold long positions. Those levels have been recaptured. Now what? Our head is on a swivel, identifying if/then scenarios in an incremental risk environment. There is still overhead resistance at downward trend lines off the highs from September. We’d like to see new highs made, and kept. Anything below the levels identified on the 19th, and we are out of our long positions. Yes, tomorrow is FOMC day. Don’t trade what you think the market should do. FOMC days are notoriously counter intuitive (what ever the market does tomorrow, be ready for the opposite to take place in the following days). Trade what you see. Price holds the final say.

Must stay above 1905 and make new highs.

Must stay above 16600 and make new highs.

Must stay above 1100 and make new highs. Right at downward resistance and Fib 62.8% — Must stay above 1100 and make new highs. Daily close at downward resistance and Fib 61.8%.

October 10, 2014 | Posted by David Zarling, Head of Investment Research

Lunch with Russell

The Russell 2000 is an index containing – you guessed it – 2000 Small Cap stocks. It’s also an index that is breaking down sharply through resistance this week. The significance of this move is a higher probability of lower prices in the immediate future (over the next few weeks). Another impact is that most US markets are correlated to the Russell 2K. Capital preservation is a smart move. Cash is a position too.

The chart below may look complicated, but it’s actually very simple if we break it down. The index formed a double top with a negative momentum divergence (black lines). Support has now been broken (shaded area around 1100). The move from the highs through the shaded resistance marks equilibrium and our measured move to the downside (orange dashed lines). The measured move lines up great with a drawn parallel trend line (green dashed line) only touched back in October 2011. The aforementioned has also lined up well with a 50% Fibonacci retracement and the 200 week moving average. This confluence of resistance is a magnet and our downside target (a drop of 11%). The only other viable target I see is at the 38.2% retracement in confluence with the already established solid green trend line (drop of 6%). We’ll continue to evaluate this decline as it moves along.

How do we take advantage? Through an inverse ETF that goes up in value when the Russell 2K drops in value. A few choices:

RWM (1x leverage): in general, every point move in RUT is a one point move in the opposite direction for this ETF
TWM (2x leverage): in general, every point move in RUT is a two point move in the opposite direction for this ETF
SRTY (3x leverage): in general, every point move in RUT is a three point move in the opposite direction for this ETF

All of the above carry risk to varying degrees. Our risk is defined: If RUT recaptures 1100, we’re out. Classic risk management. We have our stop. We have our target. Trade safe, curious investor.