Silver – volatility is suggesting an intermediate top.

I have been trading in Silver for many months. The uptrend was smooth with trading ranges, subsequent breakouts, then a range, then breakout … almost a perfect chart. That has changed. In past five days, Silver has suddenly exhibited increased volatility, with almost bubble like moves. First, it dropped by 1200 points on the day Bernanke was announcing QE2. Then it started a rally that took it from 36000 to 42000 in just five days. Today, the white metal fell from 42500 to 39500. For all I know, it could rally again, but these wild swinging moves tell us: stay away, the end is near.

I have this theory: All markets correct. Therefore, a fresh large position in Silver is justified only when there is a large enough correction. But, markets do not oblige us by falling just because we want them to. So, we wait. Remember, waiting makes money.

Dull Days

Well, I am writing this at 12:14 PM, afternoon. I do not have any intra day positions, although my Swing Trades (long in Nifty, Renuka & Dena Bank Futures for past few days) are ok. I had mentioned in an earlier post that day trades are coming down, at least for me.

So far, the Nifty has been insde a narrow range today – between 6328 and 6295, just 33 points. hence a dull day. This can also be called range contraction. Markets move into Expansion after a period of contraction. In the 5 minute time frame, we can expect a big move, soon enough.

Yesterday, I had asked readers to avoid buying in Silver since the metal prices rise was becoming a bubble. Today, Silver is down by Rs 2000 about 5 percent. We need to see a significant correction in the metal before another attractive buying opportunity emerges.
What does an overbought oscillator suggest?

Rob Hanna from Quantifiable Edges says this:
Most swing traders understand that the market has a tendency to oscillate. In other words, strongly oversold conditions will often lead to a bounce and strongly overbought conditions will often lead to a pullback. The trick in trading a swing time frame is understanding when the likelihood to reverse is strong and when it isn’t.

Trying to sell short when an uptrend gets overbought can be a dangerous endeavor. Often there will be no downside edge when trying to short into an overbought condition in an uptrend. When the market is strongly overbought due to a sharp acceleration in the trend as occurred late last week, it may even suggest an upside edge.

In any case, the point is that though the market is short-term overbought, this is by no means an ideal short setup. And in general odds seem to favor a continuation rather than a strong, immediate drop.

My Notes: The study had a simple rule: SPX (S&P) closes above its upper Bollinger Bands for the second day in a row. It also closes at a 50 day high in the last 2 days. The strategy is to buy at close and exit after X days. Mr Hanna tested X from 2 to 10 and found all days profitable, with the profits increasing if you hold for at least 3 days.

The point he made was: what seems overbought can become even more overbought. Therefore, rather than consider overbought and oversold, consider trend. This is what I tell my clients, seminar participants.