Silver May Rally If Correlation to Gold Kicks In
Silver prices are little changed today despite elevated risk-aversion and gold prices being close to breaking their December high of $1088.80. If gold does break its $1088.80 high, it can be expected that the trend would turn bullish, and this would suggest that silver prices should also be trading higher.
If it was down to gold prices exclusively, a regression model (based on daily prices over the last 6 months) suggests that silver should be trading at $14.38 (currently at $13.99). In other words, silver is in desperate need of a catch up with Gold and would be close to breaking its downward trend.
This can be used by traders that are looking for silver prices to catch up with gold. These traders would use the January 4 low of $13.77 as a base for their bullish view.
The alternative scenario (and my main scenario) is for Gold to remain capped by the $1088.80 high and for traders to keep buying the dollar despite an economic slowdown in China, as suggested by this week’s disappointing PMI Mfg. and PMI Services figures. This would make more sense as at this stage, the Fed would probably need to see a softer labour market and inflation not picking up before it reverts to raising rates further. This I something I think today’s FOMC minutes will echo.
With this in mind, I expect that traders will most likely opt to fade a rally near $14.25 with stops above $14.40. On a successful break to $14.40, silver may reach the December 2015 high of $14.62.
How do you know if a trade is good or not? You could use the risk-reward ratio as outlined in the The Traits of Successful Traders Guide.
Silver | XAG/USD
Created with Marketscope/Trading Station II; prepared by Alejandro Zambrano
--- Written by Alejandro Zambrano, Market Analyst for DailyFX.com
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