Scott Pluschau is a Contributing Editor to the ETF Digest.
Scott was a financial advisor with Citi. His technical analysis report on the Nasdaq Composite Index was recently featured by Dr. Marc Faber 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.
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.
Silver Futures Auction Market Perspective has (19) comments
Scott Pluschau:
Comments (19)
October 05, 2011
I got an email from Ed. This is my follow up in an email, and I hope this helps with any other questions:
Let me see if I can explain my methodology better. When price is in a tight range in the futures market for a few days, such as Silver has been lately, this is known as consolidation. But due to the open interest of futures, one side, either long or short, is eventually going to be hurting when the price moves away from the consolidation area. The longer it takes for a breakout, the greater the tension that builds.
Let's say in Silver the price makes a move higher out of this consolidation range as an example, then in theory those speculators who were putting on short trades inside the consolidation area over the past few days, might be closing out those losing short trades, and that is demand to buy in order to close out the trade, on top of the already existing demand of the long side buying and probably adding on the breakout, and that is what can propel the price very sharply. The further price moves away from where you entered on the losing side of the contract, the greater the potential for market orders to cover and take the loss. That is the result of a two way auction. And it is those probabilities I look for when trading. It doesn't matter what the oscillators say for me, they are lagging.
Scott Pluschau is a Contributing Editor to the ETF Digest.
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.
In full disclosure I have been long Silver futures from $18.25.
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Comments are welcome at This e-mail address is being protected from spambots. You need JavaScript enabled to view itLet me see if I can explain my methodology better. When price is in a tight range in the futures market for a few days, such as Silver has been lately, this is known as consolidation. But due to the open interest of futures, one side, either long or short, is eventually going to be hurting when the price moves away from the consolidation area. The longer it takes for a breakout, the greater the tension that builds.
Let's say in Silver the price makes a move higher out of this consolidation range as an example, then in theory those speculators who were putting on short trades inside the consolidation area over the past few days, might be closing out those losing short trades, and that is demand to buy in order to close out the trade, on top of the already existing demand of the long side buying and probably adding on the breakout, and that is what can propel the price very sharply. The further price moves away from where you entered on the losing side of the contract, the greater the potential for market orders to cover and take the loss. That is the result of a two way auction. And it is those probabilities I look for when trading. It doesn't matter what the oscillators say for me, they are lagging.
Scott Pluschau
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