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Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he... More
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  • Silver And The S & P - A Tale Of Two Markets. Outcome Of Any Trade Is Unknown. 0 comments
    Apr 27, 2011 9:41 PM

    Wednesday Evening  27 April 2011

     A day of contrasts in the outcome of two trades initiated.  We
    wanted to buy the S&P nearer the 1330 area, a place viewed as
    support and a safer entry.  As usual, the market does not know,
    nor does it care what we want, so we choose to be followers. 
    Last Sunday, we showed how the weekly S&Ps were making OKRs
    as a matter of habit, since the last swing low.  Each OKR was
    followed by higher markets,  [See S & P - What Is In A Name?,
    click on, second to last paragraph above
    second chart.

     The buy area had been identified, so it was just a matter of
    waiting to see how present tense market activity developed. 
    Wednesday's activity pretty much held the lows of Tuesday, so
    the market was consolidating gains, not correcting lower.  A
    consolidation is a weak form of correcting, and weak corrections
    most always lead to higher prices.

     The bar labeled "EUM" stands for Ease of Upward Movement, and
    it is a sign of strength.  Rather than buy immediately, we noted price
    stopped at resistance, so it was more prudent to see if price would
    fail and go lower, or break through and go higher.  It became
    apparent that price continued to hug the resistance area of 1346. 
    When a market does not react from a resistance area, it is likely to
    break it.

     The primary consideration was the trend, and it is up.  Next, we look
    for supportive characteristics in developing activity.  The weak
    correction was point number two.  The EUM bar was positive point
    number three.  While there was heavy volume shortly after the
    opening as price declined a bit, there was no downside follow-through,
    another plus.  Finally, the inability for sellers to force the market down
    at an obvious resistance area was enough information to enter at
    market, shown on the chart.

     The outcome of any given trade can never be known, that is, how
    it will develop.  Price did work higher, after entry, and now we get to
    see how it continues to unfold going into Thursday.  The odds were
    favorable, and continue to be, so there should be more upside coming. 

     Should the analysis be wrong, there is a sell stop to minimize risk
    exposure.  By contrast, the silver trade was made for similar
    reasons, but with quite different results.


     S&P 10m 27 Apr 11

     The first, and most important comment to make about silver is that
    is continues to be one of the strongest of all futures bull markets. 
    That means we only want to trade from the long side.  Silver has
    become more volatile as it has dropped from the 50 area to just
    under 45.  We took note of HOW the decline developed.

     Note the area marked as "A," the distance of the decline from
    high to low.  Volume increased sharply on the sell-off.  Price
    continued lower to "B."  The distance of "B" is much shorter than
    "A."  That tells us that the sellers' effort to push lower has weakened. 
    Further, the market starts to move sideways in a trading range.

     All of these observations are factual events recorded on the chart. 
    They are the clues that the market provides about its condition. 
    We know when a trading range develops, it can be a "resting spell"
    in preparation to continue the direction prior to moving sideways, or
    down in this instance.  Alternatively, a trading range can become a
    turning point where the market reverses the previous direction leading
    into the range.

     Given the first point, that silver is one of the strongest of all markets,
    the odds favor a turning point instead of continuation lower, but we
    need more evidence than the trend to confirm that conclusion. There
    are two high volume bars within the trading range, and they are red. 
    That indicates price was declining for each bar.  High volume to the
    downside is typically negative.  the next question to ask is, where is
    there any downside follow-through for all that effort?  There is none,
    and that is another message from the market, and that information
    helps in the decision-making.

     The further price moves along the RHS [Right Hand Side] of a trading
    range, the closer it is to reaching a resolve.  We chose to next look at
    a 10 minute chart for more clues.

     SIN 60m 27 Apr 11

     Less obvious on the 60 minute chart are the two failed probes from
    Tuesday.  There is a bunch of four consecutive red bars, selling
    activity, around 9 a.m. on the left of the chart below.  A small weak
    rally follows, and then another sell-off, another lower high rally,
    leading into new lows for the day.  Compare the volume at the new
    low with the volume around 9 a.m., considerably less.  That tells us
    the selling pressure was drying up...there were no more sell stops
    under the market, and there were also no new willing sellers to take
    price lower.

     That brings us to Wednesday's developing market activity.  From
    the 46 level, there is a sharp decline with wide range bars, but not
    so much volume.  It is more like huffing and puffing with not a lot of
    substance.  The volume spike caught our attention,  The close for
    that particular bar was just under mid-range of the bar, and that
    says there were buyers at the lows.  A new low occurred, but volume,
    [effort] was not great.  There was also an overlapping of the bars
    at the low, instead of a downward direction, and, this is not
    unimportant, silver made a higher low as it moved further along
    the RHS of the trading range.

     If our read was right, we had to move fast and buy into a
    correction that said through market activity it had lost its vitality, and
    we went long at 45.14.  Buying a correction in a strong market that
    is giving several signs of a potential turning point puts us at the
    "danger point," where the market can fail.  What is good about the
    "danger point" is that if the market does not fail, the risk is lower.

     As has been mentioned, the outcome of any given trade can
    never be known in advance.  Next, we see how the trade developed
    after entry.

     SIN 10m 27 Apr 11

     The value of trading with the trend is amplified in this situation. 
    When price went above 47 and fell back under, we entered an
    order to sell half the position at 47, and were filled not too long
    after.  It is not too often one can make $1.86 in such a short time
    with virtually zero risk exposure, for price rallied away from the
    "danger point."  

     Another order was entered to sell the balance at $48, in case
    price rallied that high in the overnight market.  We did not have
    to wait that long as the order was filled during the day, another
    $2.86 on the remaining position.  A good day's "work."

     There was absolutely no way to know how price would develop
    once a position was entered from the long side.  There are a few
    lessons to be learned.  1. Always trade in the direction of the trend. 
    2. Buy when developing market activity gives the appropriate signals,
    as we described for both the S & P and for silver.  Doing this
    consistently will prove profitable, and during the course of "grinding
    it out," every once and a while a silver trade will come along.

     Who says the markets are random?!

     SIN 10m 2 27 Apr 11

    Themes: Silver, Metals, SnP, SPY, QQQQ, Dow
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