(click for a larger and clearer image)

I don’t think it’s fair to the word “down” that everyone uses the term “update.” So from now on, when I write about downside risk, I’m going to use the term “downdate.”

The trendline that started in late January passes under today’s settlement at $41 and the one that began in mid-March at $43. I’ve put tow red arrows there only, because I don’t like to junk up my charts. There is plenty of room between today’s settlement and either of the trendlines for silver to trade within and STILL be in an uptrend.

I don’t think anyone is going to be buying there is silver is going to test the trendlines. The pros will wait for the bounce and trade off the reversal and most likely place their protective sell stops below the trendline.

Silver put in a high of $49.82 on 4/25 and yesterday’s intraday high was $49.52. Pros are going to be watching to see if silver rallies enough to take out either of those highs, especially the $49.82 on size and that it sticks there.

Let me say that again in English: Pros are going to be watching the price action to see if silver takes out the highs of this week on strong volume and closes in a range that would suggest a new high at settlement.

If that becomes the case coming into the close, I wouldn’t be surprised if traders added length to their portfolios and took it home with them over the weekend.

(click for a larger and clearer chart)

Reader Question: How were we supposed to know it was a reversal in silver, even though everyone was talking about it?

Answer: I think intraday reversals can be tricky, so don’t feel bad (unless you like feeling bad, then really feel bad). The intraday reversal is depicted in the candle in the red box in the chart above. One way to look at it is after a large spike up in price, does the price hold above the open intraday, and does the price close above the open.

Look at the chart below (Silver hourly):

(click for a larger and clearer chart)

Silver opened around $47.20 and rallied up to $49.20 — then it plunged in three large red candles. The red arrows point to the approximate open price. Once the contract trades through that price, it has given back the day’s work. Since the market had been on a fantastic bull streak, your job is to be extremely diligent in taking losses quickly and protecting your capital.

Many long traders place their protective sell stops right below the open ($47.20) or within the opening range ($47.20 – $47.60) . In markets like silver that have gone parabolic, some traders short tiny positions of 0.2% of equity (2 tenths of 1 percent = .002), for example, at these same prices in order to capture the deluge of selling pressure that they believe will occur once this treshhold is achieved. If the sell off is extraordinarily violent, the very small position will be gigantically profitable.

As always, the goal is to trade small and keep your losses small so that you can make outsized gains when the opportunity for very asymmetric payoffs become available.