Silver (XAG/USD) – Trading the Pennant and the Non-Farm Payroll Report

Silver (XAG/USD) - Trading the Pennant and the Non-Farm Payroll Report

Silver is approaching some key support levels, and is trading in an interesting pattern. Let’s take a look at a couple of scenarios that might arise after the US Non-Farm Payroll report on Friday (8/1).

First of all, let me establish the bias based on what I see on the daily chart. 2014 price action has been sideways and maybe slightly bearish because it has technically made a lower low in June vs. January, and a lower high in July vs. February.

Silver (XAG/USD) Daily Chart 8/1
silver 8/1 NFP

(click to enlarge)

However, there are some signs that lead me to believe that there is at least a better than 50/50 chance that a bullish attempt is brewing towards the 22.18 high on the year.

1) Looking at the daily chart, you can see that price has broken above a falling trendline that connects the 25.12 high from August 2013 and 22.18, the 2014-high. This breakout also brought price above the 200-, 100-, and 50-day simple moving averages, which were converging because of price trading sideways.

2) The type of decline in June vs. July. June’s pattern was sharp and July’s price action was choppy and has been forming a pennant. so it looks like July’s decline has a corrective structure , not the primary structure that the price action in June has.

3) The RSI reading pushed above 80, which is a very bullish, although for the short-term it suggested an overbought condition. After a push above 70, if the RSI can hold above 40, it reflects maintenance of the bullish momentum. At the moment, the daily RSI is holding above 40, so there is a chance for it to prove that it is indeed bullish in this daily chart.

It should be noted that these signs were apparent in February-March price action. But maybe there will be some indication of whether price will follow the fate it saw in February and March, or whether the bullish attempt and momentum since June can extend toward the highs from February.

Non-Farm Payroll since Nov. 2006 (source: July


Job data has been improving, and if NFP holds above 200, it is pretty decent. In the short-term traders might trade off the print vs. expectation (231K). So in general a strong print like 250K+ should help USD-strength, while a reading below 200K could weigh on the USD.

Previous: 288K
Forecast: 231K

NFP  Scenarios:

1) The conventional logic is that if the NFP is strong, the USD should gain across the board because it would push toward an earlier rate hike. I am not going to get into the guessing game and talk about what numbers might mean what. Let’s just judge from the reaction and make your trading decision from it instead of trying to trade during one of the most volatile moments of the month.

If this is the case with the NFP, we should see a drop below 20, and then below the 19.76, 61.8% retracement level. It would clear the moving averages. This should put the focus back toward the lows on the year. Watch for the RSI to drop below 40 as an additional sign that the bullish momentum is dead.

2) However, if price dips to the 20 area, or a tad below it but holds. We should monitor price action to see if there is support after the dust settles. That means we might need a couple of hours or even until next week to see if the 20.00 area will prove to be support. If it does, that means whatever the NFP is, strong or weak, traders are bullish on silver.

3) Finally, we might simply get a push above the pennant pattern. A break above 20.80 should clear the pennant and this week’s high. That should open up the 21.57 high, as well as the 22.18 high on the year.

I would trust this push more if the NFP report did not come up to be weak. If it is weak, then the USD-weakness could be simply a reaction. If it is strong, then the USD-weakness proves to overcome data that should conventionally strengthen it.

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