Investors: Silver Futures Auction Market Perspective (SLV, PSLV, AGQ, DBS, ZSL)

Scott Pluschau: The chart of Silver futures is brewing a combustion like chamber for a sharp move one way or the other, and the longer it takes to resolve the more explosive it becomes. Why is that the case? The bottom line is futures are a zero sum game, so everyone who is on the wrong side of all this volume/open interest the past five days and have been putting on a swing trade are going to be wrong on a breakout or a breakdown, and when they close out their loss, the good traders pile it on to deliver more pain, and usually we get a move that is twice the distance of the consolidation range in a fraction of the time it took to form it. Which way it goes? I have no idea. But as a trader I know I would not want to be on the wrong side of the initiative move or break from the extremes of this balance area during the comex session. In my opinion from an auction market perspective, any position trades placed inside the balance area are guessing or relying on luck in the daily time frame. And that doesn’t last very long in the business of trading.

What is a balance area? A balance area is where the market has clearly found value in a particular time frame due to the tremendous trade facilitation taking place within the price range. Markets move from balance to imbalance and what causes imbalance is when market orders come in and there are not enough offers or bids to meet that supply or demand, increasing volatility (scaring the heck out of those in the red). There may also be large and increasing market orders to close out losing positions of the weak handed open interest when the auction takes price away from value. It takes strong hands to cap those moves and that is what sets up the responsive move a.k.a. the reversal.

Supply and demand determine price and in order to make it as a trader I know I have to only look at the probabilities of an increase or decrease in either one and apply the appropriate strategy. While I prefer to stay with the prior trend, what has me biased or leaning toward the responsive “trade” in Silver after a failed breakdown is the open interest has been declining over 10% since the beginning of September, and the Commercials have been decreasing their net short position. I am also looking to get long for a trade on a breakout as well, and keep my stop below what is known as the Point of Control or High Volume Node in the balance area that is forming, which would make my trade invalidated if the stop loss gets executed. The loss is acceptable because the initial reward is a multiple of the risk with favorable enough probabilities for an increase in demand. I would take that same setup again and again and again, which leads to a trading system with positive expectancy over time.

In full disclosure I have been long Silver futures from $18.25.

Related ETFs: Sprott Physical Silver Trust (NYSE:PSLV), ProShares Ultra Silver (NYSE:AGQ), PowerShares DB Silver (NYSE:DBS), ProShares UltraShort Silver (NYSE:ZSL), iShares Silver Trust (NYSE:SLV).

Written By Scott Pluschau From ETF Digest

Scott was a financial advisor with Citi. His technical analysis report was recently featured by Dr. Marc Faber on the Nasdaq Composite Index in his June 1, 2011 Gloom Boom & Doom report. Scott earned his degree in Accounting and Taxation from Pace University. He lives in Long Island with his wife Ilona, daughter Olivia and new baby Henry.

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.  Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.


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