Using Relative Strength to Profit in the Metals

Relative Strength is a technique that compares two assets to each other to identify the better performer.  We use relative strength all the time in the real world as well as in financial analysis.

For example when we shop for a new car, we usually compare a few of the traits of each potential vehicle.  Is one faster than the other, is it more expensive, or does it get better gas mileage?  These are all forms of relative strength analysis and they can help us make more informed decisions.

In investing one way we measure relative strength is by comparing price movements.

Recently, we did this with silver and gold which helped us identify a low risk profit opportunity.

Relative Metals

Gold and silver are two most popular (and liquid) precious metals.  (Platinum and palladium are also part of the PM group.) Gold's most liquid and largest ETP is the SPDR Gold Shares (NYSEARCA:GLD).  The Silver equivalent is the iShares Silver trust (NYSEARCA:SLV).

Although extremely popular, both ETPs have been beaten down. Silver (NYSEARCA:SIVR) and gold (NYSEARCA:DGL) are each down over 4% YTD.  Beneath the surface, we've seen this price weaknessas an opportunity to capitalize.

We noticed a few things on 2/17 when GLD was trading at $155.76 and SLV was trading at $28.83. 

First, silver was triple bottoming at its $28.50 price, where we advised, "Aggressive traders can sell a breakdown of the triple bottom $28.50 on Silver.  Stops should be placed above the Monthly S1 pivot around $29."

Secondly, this silver short was supported by the chart below which we provided to ETF Profit Strategy Newsletter subscribers with the following commentary:"The chart shows how GLD is already revisiting its lows of last summer while SLV still sits above its.  The potential exists for Silver to fall further before support is reached making it the more likely candidate for a continued selloff if recent support at $28.50 cannot hold." 

Simply put, GLD was already at its long term price support zone shown in blue below $156, but silver's equivalent was below $28 with its price not yet there.  Gold was already in a price area where buyers previously supported prices.  Silver had yet to reach that level making it the more likely candidate to fall further in price.  Couple that with the triple bottom on Silver, and we had a high probability trading opportunity.

The next day the triple bottom at $28.50 failed, and 3 days later on 2/20 the trade was closed as silver fell to its long term support zone at $27.59 for a 3% profit in 3 days.

We used a similar technique recently to take advantage of the bearish move in gold mining stocks (NYSEARCA:GDX). On 2/14/13 when, the Direxion Daily Gold Miners Bear 3x Shares (DUST) was at $42.09 per share when we wrote to subscribers:

"Thus far this year, shorting mining stocks is one of the few short trades that have delivered handsome gains. The Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) is already ahead over 37% since the beginning of the year. Buy DUST at these levels." Where to from Here?

Given price is now firmly in the long term support highlighted in blue in the chart above, we are expecting the selloff in Gold and Silver to take a breather.  However, if key support levels we are following breakdown, we will again entertain short positions as those levels remain key to the longer-term precious metals trend. 

Some aggressive ETPs that can be used to take advantage of the short side, if a breakdown indeed occurs, are the VelocityShares 3x inverse Silver (NYSEARCA:DSLV) or the DB Gold Double Short (NYSEARCA:DZZ). 

We also are watching a key trendline for a price breakout and rally. 

Given all the negative sentiment surrounding the metals, this is our expected next profit opportunity.  Once price confirms a trend change from down to up we expect to be able to take advantage of a long setup by buying aggressive long ETPs such as the ProShares Ultra Gold (NYSEARCA:UGL) or the ProShares Ultra Silver (NYSEARCA:AGQ).

Gold and silver are in between important support and resistance levels right now.  A breakdown or breakout of either will likely provide another high probability trading opportunity.  The ETF Profit Strategy Newsletter provides comprehensive technical analysis across major asset classes that is boiled down to actionable, easy-to-understand trade setups.