Relative Strength is a technique that compares two assets to
each other to identify the better performer. We use relative
strength all the time in the real world as well as in financial
For example when we shop for a new car, we usually compare a few
of the traits of each potential vehicle. Is one faster than
the other, is it more expensive, or does it get better gas
mileage? These are all forms of relative strength analysis
and they can help us make more informed decisions.
In investing, one way we measure relative strength is by
comparing price movements.Recently, we did this with silver and
gold which helped us identify a low risk profit opportunity.
Gold and silver are two most popular (and liquid) precious
metals. (Platinum and palladium are also part of
the PM group.) Gold's most liquid and largest ETP is the SPDR
Gold Shares (NYSEARCA:GLD). The Silver equivalent is the
iShares Silver trust (NYSEARCA:SLV).
Although extremely popular, both ETPs have been
beaten down. Silver (NYSEARCA:SIVR) and gold (NYSEARCA:DGL)
are each down over 4% YTD. Beneath the surface,
we've seen this price weaknessas an opportunity to capitalize.
We noticed a few things on 2/17 when GLD was trading at $155.76
and SLV was trading at $28.83.
First, silver was triple bottoming at its $28.50 price, where we
advised, "Aggressive traders can sell a breakdown of the triple
bottom $28.50 on Silver. Stops should be placed above the
Monthly S1 pivot around $29."
Secondly, this silver short was supported by the chart below
which we provided to ETF Profit Strategy Newsletter subscribers
with the following commentary:
"The chart shows how GLD is already revisiting its lows of last
summer while SLV still sits above its. The potential exists
for Silver to fall further before support is reached making it the
more likely candidate for a continued selloff if recent support at
$28.50 cannot hold."
Simply put, GLD was already at its long term price support zone
shown in blue below $156, but silver's equivalent was below $28
with its price not yet there. Gold was already in a price
area where buyers previously supported prices. Silver had yet
to reach that level making it the more likely candidate to fall
further in price. Couple that with the triple bottom on
Silver, and we had a high probability trading opportunity.
The next day the triple bottom at $28.50 failed, and 3 days
later on 2/20 the trade was closed as silver fell to its long term
support zone at $27.59 for a 3% profit in 3 days.
We used a similar technique recently to take advantage
of the bearish move in gold mining stocks (NYSEARCA:GDX).
On 2/14/13 when, the Direxion Daily Gold Miners Bear 3x Shares (
) was at $42.09 per share when we wrote to subscribers:
"Thus far this year, shorting mining stocks is one of the few
short trades that have delivered handsome gains. The Direxion
Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) is already ahead
over 37% since the beginning of the year. Buy DUST at these
Where to from Here?
Given price is now firmly in the long term support highlighted
in blue in the chart above, we are expecting the selloff in Gold
and Silver to take a breather. However, if key support levels
we are following breakdown, we will again entertain short positions
as those levels remain key to the longer-term precious metals
Some aggressive ETPs that can be used to take advantage of
the short side, if a breakdown indeed occurs, are the
VelocityShares 3x inverse Silver (NYSEARCA:DSLV) or the DB Gold
Double Short (NYSEARCA:DZZ).
We also are watching a key trendline for a price breakout and
Given all the negative sentiment surrounding the metals, this is
our expected next profit opportunity. Once price confirms a
trend change from down to up we expect to be able to take advantage
of a long setup by buying aggressive long ETPs such as the
ProShares Ultra Gold (NYSEARCA:UGL) or the ProShares Ultra Silver
Gold and silver are in between important support and
resistance levels right now. A breakdown or breakout of
either will likely provide another high probability trading
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