Silver - Back Inside the Pennant Formation

If you go back to my last post from Wednesday, you'll see that silver was working its way through a pennant consolidation pattern and we were waiting to see which way things would break.  At the time I had already taken profits and was back in cash, and wasn't feeling to good about it.  As luck would have it, the sellers ended up taking control in the Weds - Thurs overnight session, and took price down below the pennant.  Then on Friday we (here in America) woke up to news of the earthquake in Japan, and we saw quite a sell-off across almost all market sectors, precious metals included.  Then by mid-morning on Friday some bad econ reports in the US and resultant posturing by a score of pundits in the media discussing the potential necessity for QE3 sent the precious metals rocketing higher. 

The 60 minute chart above shows the price action in silver that I just described in the opening paragraph.  Back on Wednesday I said that if we ended up selling-off, I would be looking to buy the dip at either the $35 or $34 support levels.  I wasn't able to watch the markets at all on Thursday, but on Friday morning I was watching $34 in silver and $1400 in gold very closely to see if they would hold.  This next chart below shows silver on a 4 hour time frame, and illustrates why I saw the $34 level as significant support.

Silver only got down as far as $34.05 in the spot market, then it was rally-ho from there.  I bought some May call options when price broke through $34.50, hoping for the best, but ready to sell if we sold back down to $34.  It was touch and go there for the first two hours with price dropping back below $34.20 again, but the silver bulls finally took control and sent us back over $36 by noon time (EST).   Then guess where we met resistance?  Yep, back at the descending trend line that formed the top of our pennant pattern from earlier in the week.  So if you refer back to the first chart above, you'll see that we are right back in the middle of the consolidation pattern, so once again, we are waiting to see how this pattern resolves.  I took profits on half of the position I entered on Friday morning...I mean, a $1.50 - $1.75 move in silver within the space of 4 hours is pretty huge when you're speculating with options, and there's no sense in getting too greedy.  After all, who knows what will happen over the weekend, right?

Where we go from here is the question.  I think chances are good that we will at least go back up and test the previous high at $36.76, and then $37.  That range is the key inflection point.  As previously mentioned, silver has had quite the run-up since the last correction...$26.50 - $36.75 in the space of seven weeks is pretty impressive...so it wouldn't surprise me to see correction after double-topping between $36.75 and $37.   In fact, I'll probably take profits on 50% of my remaining position if we get in this range then wait and see how things go.  If the bulls remain in control, we could see $40 pretty quickly, but I think we only have a 30% probability of that happening just now.  As we get closer to the end of the May futures contract, we will very likely break $40, but that move is some weeks away in my opinion.

Should be an interesting week yet again. There are a lot things going on around the world these days and then there's the media's spin on these events, both of which are adding a lot of volatility to the markets.  My best advice - stay nimble and don't over-leverage in either  direction.