Changing Silver into Gold

• Posted by Greg Harmon
• on May 17th, 2011

As the ratio of the SPDR Gold Trust Shares (ticker: $GLD) to the iShares Silver Trust (ticker: $SLV) retests the 4.5 breakdown level technicians start to get more interested. With every approach of a trend line brings a potential trading opportunity. Will it hit the trendline and reject back lower? Or will it move through it and head back into the previous range. What does the set up for this retest suggest? There are indicators lining up on both sides.

The gap higher off of the bullish engulfing candle of 4 weeks ago was massive and was the first test of the 4.50 level. The second is occurring now. As it has jumped and held, the Moving Average Convergence Divergence (MACD) indicator crossed positive and the Relative Strength Index (RSI) moved straight up to the mid line from an oversold level. These point to a break higher. The volume has been declining ever since July when the decline in the ratio began. It has not improved. That is not a good supporting sign, but a volume spike would be a signal to get long the ratio. Looking at the Fibonacci retracement levels, the trendline falls just below the 23.6% retracement level at 4.56 adding to the potential strength of the resistance of the trendline. The Simple Moving Averages (SMA) gave the ratio support of the 20 week SMA for a couple of weeks, but they all slope sharply lower other than the 200 week SMA, that is a nearly 4 year moving average though, which should be looked at more of like a mean reversion line.

The key is to play the ratio from whichever side it gives you. On a break above the 4.50 line expect resistance at 4.56 and through that a move to 5.00 and then 5.46. On a rejection of the line then look for consolidation at the 20 week SMA again and a move to 4.00 if that fails. This picture holds for the futures contracts as well, with a multiplier of 10 for the trend line, as shown below. Trade it well.

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