Shorting Silver Looks Better Than Shorting Gold

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Shorting Silver Looks Better Than Shorting Gold

Gold and silver have been trading in a similar manner in July, which should not be a surprise. Their price action has been mainly a function of the USD. In the second half of July, we saw USD gain across the board, while gold and silver, priced in the USD, have topped off and fallen. We saw both gold and silver claw back some of their losses to end last week. This week, let’s examine the sell-on-rally trade idea for these two “precious” metals.

Gold (XAU/USD) 4H Chart:
Gold 4H Chart 7/28

(click to enlarge)

Looking at the 4H chart, we see that a sell-on-the-rally trade idea is viable even as price pushes back above 1300 and a falling short-term trendline.
1) The RSI is holding below 60. In fact we should look for sellers as the RSI turns down from 60.
2) Price is back in the cluster of moving averages (200-, 100-, and 50-period) in the 4H chart. This area represents possible resistance.
3) Price is back at an area of common support back in late June, which could also be turning into resistance.

Assessing the reward to risk:
Let’s examine a trade idea to sell at 1310.

If our stop is at 1330, it would clear last week’s high, which allows plenty of room for a bearish outlook to develop if the market is indeed bearish in the short-term. That would offer a risk of 20 units.

Let’s limit the target to 1280, 61.8% retracement of the 1240.50-1345.28 rally. That would represent a 30-unit reward.

The 3:2 reward to risk does not look very attractive, but this is a conservative plan. A swing projection for example would target the 1273 area, which would bring the reward to risk closer to 2:1.

What about Silver (XAG/USD)? Here’s the 4H chart:
silver 4H chart 7/29

(click to enlarge)

Silver has a similar predicament in terms of why we should consider selling on a rally. It looks to be in a better position for doing so since its falling short-term trendline is still intact. Let’s move right to the reward to risk assessment.

R:R Assessment
Let’s saw we put a sell at 20.80, with a stop at 21.35, which would clear last week’s high of 21.25. This gives a risk of 35 points.

An average target could be around 20.00. This will offer a potential reward of 80 points. This in turn translates to a reward to risk ratio that is slightly better than 2:1.

Final Words:

It looks like from a reward to risk perspective, silver’s sell-on-rally trade idea is better. Also the fact that the falling trendline is intact in silver, gives it a more convincing bearish outlook.

Also consider where the stops are. Clearing gold’s high from last week, does not clear some key resistance around 1330. That means, if you really wanted to give gold elbow space, you risk more. For silver, 21.35 not only clears last week’s highs but also the last high before price went to 21.57. Therefore, the stop placement is in a way better for silver than for gold, not only because of the reward to risk, but also because it just makes more sense.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.