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Preserve Profits in Silver by Selling Into Intermediate Term Climax

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Selling silver and other precious metals is often a smart thing when everyone wants to own it all at once and buying reaches capitulation levels.

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Silver has received a great deal of press lately with its recent move to 31-year highs, and is now all the rage as more and more TV commercials admonish viewers that "there has never been a better time to own silver." Well, certainly April 2011 has never been a better time to own silver, at least not since 1980, thanks to the fact that silver has rocketed over 120% to 31-year highs approaching $50-per-ounce since breaking out through the $20-per-ounce level in September 2010, when we ourselves first got very bullish on the white metal. While the commercials are intended to entice viewers to purchase silver, they are careful not to say that now is the best time to actually be buying it. In fact, the empirical evidence shows that when silver is shooting higher in a parabolic or near-parabolic uptrend, one may be better off selling instead!


Silver goes into a climactic run as the crowd rushes in to buy right at the top.

A recent chart of silver, as represented by the iShares Silver Trust ETF (SLV), shows how the metal went into a parabolic "blow-off" or "climax top" type of move. Such price movements occur after a security has been trending higher for several months, and as it continues to go higher and higher the crowd eventually rushes in at the end as it can no longer stand to watch the price go any higher. This is often evidenced by seeing a security, such as silver in the chart above, begin to accelerate its uptrend at the tail end in parabolic fashion. Silver in this case was a model example of climactic or "capitulation" buying as it was up 8 days in a row and 14 out of 15 days before spot silver prices topped out just below $50-per-ounce. Note the long upside price ranges in the days prior to the peak as buyers clamored to get in, with the last day of the eight-day run showing the widest intra-day price range as evidenced by the length of the last upside price bar before silver turned to the downside. As well, trading volume was overwhelmingly massive, attesting to the crowd of buyers rushing into silver right at the peak. This is a classic "climax top," and silver at the end of April exemplified all the key technical characteristics of such a top.


Silver has had more than one climactic type of top during its overall uptrend since 2006.

While silver's climax top at the end of April was likely an intermediate-term peak for the white metal, it doesn't have to mean that the long-term trend of silver will not continue to the upside. Silver has had two other climactic types of price moves, once in April/May of 2006 and once in March of 2008. Both times silver peaked and then pulled down sharply, causing much pain to late buyers who came in right near the top. However, as we see in the chart above, each climactic top simply led to a correction and then a long consolidation of several months before the metal was able to set up and breakout to new highs again. Silver may consolidate again here for a period of time, but the message is clear: "buy it when it's quiet," not when everyone (as in "the crowd") wants in! Buying silver when it is already in a parabolic or sharp upside trend is dangerous, but investors who were smart enough to buy silver when it was previously "quiet" and own the white metal as it matures into such a parabolic trend should be able to recognize the signs of a climactic top characterized by "capitulation" buying. The historical precedence shows clearly than when silver is going parabolic, owners of the metal should use a working knowledge of the basic characteristic of a climax top as a method of knowing when to back away and take profits, looking to re-enter at a lower price and in a lower-risk technical position.

Editor's Note: This article is written by Gil Morales and Dr. Chris Kacher, co-founders of Virtue of Selfish Investing and co-authors of the book "Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market."
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No positions in stocks mentioned.

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