In February I posted an idea to short gold and buy silver simultaneously at the 79 oz level as the ratio hit the top of the multi-decade range. The progress was surprisingly good and I wrote about it in July update and then the ratio stalled. Today I would like to show how we can use this respite to pocket gains.
Below is the ‘face-lifted’ February chart where I put focus on the main idea.
Chart 1. Gold/Silver Ratio: Mid-Range Set Strong Barrier
This is the so-called ‘bird’s-eye’ view of the ratio. Twenty years in the range with rare overshoots beyond the range and the single ultra-strength of silver in 2011, this could be titled as the fearless or careless time as you wish.
It’s ironic that when I put the mid-range (halfway) in my July update, the ratio stalled right at this level as you can see in the chart above. Magic? Yes if we mean the magic of math. For me, in addition to magic numbers, it means that the range was set properly and the mid-range worked well although it put a pause to the gains of our idea.
As you can see from the history seen on the left part of the chart the move of the ratio was not straight at all and it usually draws the zigzags. This time we could also witness the same trend-countertrend interchange. In the next chart, I will share with you some interesting technical insight about the ratio.
Chart 2. Gold/Silver Ratio: The Bear Flag
The multi-year uptrend was broken this year and the ratio showed a very healthy pullback to the broken trendline and then continued downside. When it reached the mid-range point depicted in the Chart #1, the ratio started to move in a countertrend direction.
I put the 50% Fibonacci retracement level to the chart to show you how deep is the current correction of the gold/silver ratio, which almost reached that level. This countertrend move has a corrective structure with many deep zigzags, which is common for consolidations. It means that after the end of consolidation we could see the continuation of the downtrend.
The above-mentioned consolidation shaped the Bear Flag continuation pattern (highlighted in blue). It’s a famous pattern and you saw it many times before in my posts. The left blue arrow highlights the Flagpole distance of the pattern. We need to measure it to find the target for the pattern. Once the ratio breaks down the downside support of the Bear Flag at 68 oz mark, we should subtract the Flagpole’s distance from the break point as it is highlighted in the right blue arrow. The target is set at 56.4 oz level; it is higher than the range’s target (51 oz) but confirms the overall direction of initial short setup.
Those who are short already can keep the position with the break-even stop and enjoy the safe trade; the fresh sellers should put the stop at least above the maximum price level within the Flag to limit the risk.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.