A lesson in Fibonacci retracements from the silver market

In my last post on silver, I showed how, by using the basic Fibonacci tool on your spread betting platform, you could have picked off a great trade entry point at limited risk.

I left you in the lurch somewhat with the market at or near the Fibonacci 76.4% retrace of the previous wave (this is on Tuesday 3 May):

S&P 500 spread betting chart

(Click on the chart for a larger version)

Let’s see how the market developed from there.

To recap, on Tuesday 2 May, the market made a clear three-wave A-B-C rally (which is always corrective against the new trend) up to $47.40 – the Fibonacci 76.4% retrace of the move down from the $49.70 high to Sunday’s $42.00 low.

That was a great place to enter a short trade, because even if the market rallied further, your natural protective stop position was just above the 2 May high, which was then only a few pips away.

That would have been an excellent trade, despite a loss, because you would have followed a solid money-management rule, limiting risk.

Don’t forget: set sensible stops at all times

One of the worst things a trader can do is not to set a protective stop, or to move it away from the market as it approaches your first level.

Good traders have the discipline to set sensible stops at all times. If stopped out, you always have the option of re-entering.

Here, I used a Fibonacci retrace level to enter and set my stop above. That is a technique I use a lot, and I highly recommend it.

What’s been happening in silver this week?

Here is the position on Tuesday 10 May:

Gold spread betting chart

(Click on the chart for a larger version)

As we all know, the market collapsed to make a low of $33 on 6 May. It then embarked on a relief rally. Now, why do I call it a ‘relief’ rally?

After every huge plunge in any market, that is against the expectation of the majority, there will come a point where the profit-taking and new buying will overcome the panic selling of the trapped longs.

That point was reached at the $33 low.

The rally is thus a relief from the tsunami of selling.

Also, take a look at the nature of the rally on the hourly chart – lots of small overlapping waves where the rise was shallower than the preceding collapse.

It is clues like this that often give the game away that the rally was not to last.

And so it did give way, but where did the rally carry? To the exact Fibonacci 38.2% retrace of the previous wave at the $39.40 level.

That was my target as marked – which I had evaluated well before the high was made. Preparation for a trade is key to success.

That was yet another great place to enter short trades, placing protective stops just above the Fibonacci level.

Nasdaq spread betting chart

(Click on the chart for a larger version)

Has this trade worked out? Here is the latest chart as I write:

Silver price spread betting chart

(Click on the chart for a larger version)

It certainly has! I am able to draw a super tramline pair, which is as close to perfect as is possible.

Also, I have drawn in my Elliott wave count, where our latest short trade was at wave 4.

Who says the markets are random and have no internal order? They haven’t seen charts like this, evidently.

How far will silver fall?

As I write (on Thursday 12 May), the market is heading into new low ground and searching for a wave-5 low. It could be here pretty soon.

Why? Because there is a potential positive momentum divergence.

Of course, if the market gets closer to my lower tramline (around the $28-29 area) on this wave, that would be a great place to take profits.

But with the market deeply oversold, and with bearish voices getting louder and louder, my guess is that we shall see a low for this move around current levels or slightly lower.

By the time you read this of course, the market may well be far away from the current $33 area! It is moving very quickly and has a history of making sharp, spiky moves.

To win with silver now we have had the wipe-out, you need to be very nimble.

And don’t forget, that it is often prudent to pocket your profits and sit on the sidelines for a while until you see another great entry point.

If you are a long-term position trader, you will be holding short silver positions and moving your stops down as the market falls using the ‘trailing stop’ method.

I have focused on silver for my latest posts because it is offering terrific examples of how I use Fibonacci, Elliott wave, and tramline methods all over the space of a few days.

These are exciting times.

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