Gold/Silver Spread: Revision For Reentry Parameters

Gold/Silver Spread

On December 21st we issued reentry parameters for a hypothetical trade on the short side of the February-March gold/silver (x7,000/oz.) spread. With the First Notice Day for the February gold contract coming up in three weeks, it might be prudent to go ahead and use the April gold contract instead.

In the first half of December, the gold/silver (x7,000/oz.) spread broke a prior month’s low for the first time since July and altered the bullish price structure. We initiated a hypothetical short position since it also closed below the rising 50-day Moving Average for the first time since early August. This bearish trend change signal was nullified when the spread broke out to new contract highs a couple of weeks later.

Since the 50-day MA did not work, we are going to come back with a slower Moving Average to see what the current best-fit is for the April-March gold/silver (x7,000/oz.) spread. This is kind of like tuning into a radio station where we can hear the song, but we are still trying to eliminate that little bit of static that’s still there. By slowing it down to a 60-day MA, we can see that the decline into the December 10th correction low ended after the spread found support at the rising 60-day MA and scraped against it for three days straight. A new bull market high soon followed. Therefore, a two-day close below the rising 60-day MA for the first time since the first week of August would indicate that this moving average has failed. This would certainly be a good reason to take another crack at the short side.

April Gold March Silver (7,000 oz.) spread daily

April Gold March Silver (7,000 oz.) spread daily

In the event that the April-March gold/silver (x7,000/oz.) spread gets decimated in just one day, we also want to keep a fail-safe in place to get short if last month’s low is breached in just one day. This would alter the price structure and potentially set off an immediate meltdown. Not a high-probability scenario, but still a possibility. In trading, you have to have a plan for dealing for the improbable because it does happen sometimes!

Trade Strategy:

Cancel the hypothetical order to sell a the February-March gold/silver (x7,000/oz.) spread and replace it with a new hypothetical order to sell one 100 oz. April gold contract and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts if the spread makes a two-day close below the rising 60-day Moving Average (currently around +$5,211) or a one-day close below the December 10th low of +$2,691, whichever occurs first. Initially, the spread will be liquidated on a two-consecutive day close $500 above the contract high that precedes the entry signal (currently at +$9,297).

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