Silver Has High Breakout Potential in February

Silver and gold have been interesting to watch since the beginning of the year. We’ve seen violent inter-day swings and failed breakouts. The current trading setup in silver, however, is very bullish for this week and the rest of February. If this setup succeeds it will represent a reversal in the price on a monthly basis and a new trending move.

For this article I’ll use the iShares Silver Trust ETF (NYSEARCA:SLV) to assess price. I will also be using trading quantitative techniques that I discuss in my book The Big Trade: Simple Strategies for Maximum Market Returns. My system is predicated on assessing the probability that the next bar will be higher or lower than the previous one and it uses only the stock’s past trading data to calculate the probabilities. In this case the last bar for silver was a bullish up bar. What we are looking for now is the probability that this week’s bar will be another up bar and then look for the probabilities of the following conditions:

That SLV will break the previous week’s high (marked #1)
That SLV will close the week above the high from the week previous to that. (marked #2)

Closing above bar #2 would constitute a 2 bar reversal pattern that would be a clear breakout sign from the 7-week consolidation whose range is defined by the high from peak two and the lows from mid-December (gray box).

The Setup

One of the key concepts of The Big Trade is that classic opening range theory – a period of time where bulls and bears define the trading range – can be reimagined as a slice of price. By looking at the impulses within a bar we can calculate the probabilities of the trade moving towards and through the top or bottom of a consolidation. Here’s what we know about SLV for bars #1 and #2:

So, with that in mind we can ask the question of SLV (assuming SLV opens near the Close of #1):

If SLV moves up $0.10, up to $30.88 then what is the probability of it moving to $31.25, through the Bar #1 high of $31.22? The answer is 62.0%

If SLV moves down $0.10 to $30.68 then what is the probability of it moving to $29.70, through the low of Bar #1? The answer is 29.0%

So there is a better than a 2:1 chance that SLV will break the previous week’s (Bar #1) high versus breaking the previous week’s low. Those are good odds. Also, if Bar #1’s high is broken it reinforces the bullish probabilities because the chance of SLV breaking both the High and the Low of the previous bar is just 8.9%. Therefore, a daily close above $31.22 would be a very strong signal of bullish impulses in the market overwhelming bearish impulses – the supply of buyers is stronger than the supply of sellers at the marginally important price points.