FMX|Connect- WWW.FMXConnect.com (Reported on 7/11/2011)
At FMX|Connect we offer little variety in the technical analysis arena. We leave that expertise to Peter Beutel of Cameron Hanover fame, one of the preeminent energy analysts of our generation and someone with whom we are proud to partner.
There are however two indicators that we feel quite comfortable with. These indicators are largely based on probabilities and volatility, areas we are much more at home assessing.
The first one we’ve called our Trend-Vol Indicator. It measures the risk-reward in being short volatility through its cycles. Secondly, it often gives a low noise directional indicator which our readers may know we’ve used with some success during this Gold bull market. Its methodology is largely home-grown and proprietary: but suffice to say, it is a concoction of Bollinger bands, historical and implied volatility correlations, with a dash of skew thrown in.
The second indicator we claim less ownership of, but have done some refinement to. It is something called the 6 Week Reversal signal, and if memory serves, was popular with Connors and Raschke for a while.
Silver is entering an area right now that puts it on our radar for both indicators. This is extremely rare, considering the Trend-Vol system is used for breakouts, and the 6WR is for reversals. Before we get into it, some basic technical stuff we see in Silver.
Non-Confirmation Low vs. Moving Average Iron Cross
First look at the low of July 1st. While it does not pierce the low of June 27th, it is close enough in our opinion to compare Stochastics and RSI for those days. The lows in both Stochs and RSI on July 1st do not come anywhere close to the lows established on June 27th. To us this is a non-confirmation of the selloff.
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Next look at the moving averages right above the market. The 50 day and 100 day come in at 36.73 and 37.08 respectively. Fierce resistance one should think, especially with the 50-100 crossing lower. So while the non confirmation is less than bearish, the moving averages above are quite daunting to bulls. Right now we are not predicting direction. |
Enter Volatility and the Trend-Vol Indicator
We’ve seen enough from the chart above to just watch and wait. What interests us is the tightness of the Bollinger-bands. Volatility has very little noise in its cycles of movement, and we feel that when these bands widen in opposite directions, it will not be a false indicator of increasing volatility. A directional player would look to go with the direction of the midline (20day MA) when the bands widen in opposite directions. All we can divine at this very moment is that implied volatility is a poor risk reward to be short right here. We’d rather buy strength in Vol than weakness, but shorting it may be a recipe for disaster. And the kind of disaster that Silver serves up is one where there is no exit if you are wrong in options. Silver is often referred to as the roach motel of options if you’re position is wrong. Traders check in, but they don’t check out. Here is a previous example of the Trend-Vol system at work.
Trend- Vol example: Previously In Gold
Previously Posted on February 24th
Over the past 4 weeks we have said repeatedly that Gold has an excellent chance of a $75.00 to $150.00 rally from the area of 1410. We picked $1550 as our home run scenario. It is time for an update.
Simply stated, if this week closes above 1416, there is a high likelihood of a 75 to 175 move higher in gold over the next 2 months. Although if the indicator hits, we'd expect the move to happen in a more compressed time. The signal does not usually waste time letting you know if it is right or wrong.
The Breakout
The Payoff
So you can see how it works. The question is, will it happen in Silver any time soon? These triggers happen at most 3x a year in a commodity. On to our other “technical” indicator.
The 6 Week Reversal Indicator 
The 6WR is pretty cut and dry the way we use it.
1. A market makes a 6 week low where the close is higher than the open.
2. You should buy the next week when it breaks above the previous weeks high (35.14)
3. Your stop loss is near the previous week’s close of 33.69.
It gives a nice risk-reward usually. That trade happened last week, and the favorable risk-reward is no longer there. When it is right, it is right quickly as shown last week. When it is really right, it gets legs and moves for another 2 to 6 weeks in the same direction. That is what now interests us. So although the 6WR risk-reward aspect isn’t optimal anymore, we are now looking at it as a possible indicator that the Bollinger Band break-out will be higher.
Conclusion
As of right now, our own activity is to sit and wait for the market to show its hand. But when you look at Gold threatening to test that 1550 area for the millionth time, and Silver sitting right under its 50 and 100 day moving averages, we think fireworks will happen soon. Massive rejection or major breakthrough, we’re not sure. But both are on our radar, and we will advise our readers when we believe a trade has been triggered. Good Luck.
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About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants.
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