XAGUSD bulls brace yourselves for gap-closing throwback
After Brexit, XAGUSD rallied and broke previous 52-week high at $18.477. It went on to establish new high at $21.13. Subsequent support was made at $19.20. This formed a gap between $19.20 and the breakout level of $18.477. The concept of ‘throwback’ considers price going back to retest old breakout level at $18.477 high probability. This move will ‘close the gap’ but bring a lot of pain for existing long positions.
Weakness could lead to throwback
Silver bulls enjoyed a lucky post-Brexit rally that took XAGUSD to a new 52-week high of $21.13 an ounce. Five weeks after $21.13, XAGUSD has not been able to hit this price level again. There could be someone sitting on long XAGUSD contracts at more than $1.30 loss at current price – not pretty if it is a leveraged position. A throwback might not change XAGUSD’s uptrend but could be painful enough to trigger cut loss and add fuel to shorts.
- XAGUSD is trading $19.797 at moment.
- Current 52-week high at $21.13.
- Previous 52-week high (for 2015 and most of early 2016 until end June) was $18.477.
Five weeks after that new 52-week high, it looks like XAGUSD might be due for correction. There are two reasons:
- I personally foresee DXY strengthening with a confluence of signals such as here and here.
- XAGUSD is now in the red for August, price action showing resistance to August open at 20.33 (see light blue box at top in chart below). There is also a resistance between 20.65 – 20.75. As always, price finding is a series of tests – if price is not able to break up after a few tries, bears take over, pushes it down until bulls come in to support.
Covering that gap would be gut wrenching
There is what I consider a gap (yellow). It is between the most recent verified/observed support of 19.20 (see dark blue zone) and previous 52-week high of 18.477 (green).
It is a highly recurring phenomenon for price breaking new 52-week levels to come back to retest the old level. It is called a throwback (definition at bottom). Throwbacks do not happen all the time but can be observed a lot. XAGUSD’s recent price action show that after a new 52-week level of $21.13 was set over a week after Brexit, a support was formed at $19.20. Bulls were probably very excited and encouraged to go long at this higher level. As a result, a complete throwback to breakout level at old 52-week level of $18.477 was never made thereby forming gap between new support and old breakout level.
If XAGUSD is sufficiently weak, bears might be encouraged by another round of selling possibly breaking $19.20 support. Then 18.477 will come into play. Price hitting this level will close gap.
Based on currently traded price at $19.797, a person with long position will encounter a 6.66% loss (call that one unlucky coincidence) should price go to $18.477. With such a setup, XAGUSD would still be bullish. Indeed I foresee bulls waiting on sideline to come in strongly at $18.477 region. For anyone with a 6.66% loss on a leveraged account such a move would be very painful however. For the guy(s) who bought at 21.13, it would be a $2.65 loss per ounce, a very hefty 12.55% pain.
A price move back toward the entry level of a security that has broken beyond the barrier of a price pattern or trendline. The retreat toward the level of the breakout is not uncommon and is used by many traders to confirm the validity of the new momentum. Notice how the price in the chart below retests the neckline of the head and shoulders pattern before continuing its move higher.