Silver And Gold: Take Profits On Longs And Wait For Mean Reversion

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Includes: AAAU, AGQ, BAR, CEF, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDM, GLDW, GLL, GTU, GYEN, IAU, IAUF, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIL, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Equity Management Academy
Summary

The Variable Changing Price Momentum Indicator is recommending taking profits in the gold and silver markets on any long positions.

Then wait for a new price equilibrium to be set, which will allow the VC PMI to create a new structure or setup with new buy and sell levels.

The two levels of the extreme above the mean are the sell 1 (S1) level of $15.89 and the sell 2 (S2) level of $15.94.

The Variable Changing Price Momentum Indicator is recommending taking profits in the gold and silver markets on any long positions.

This is the Variable Changing Price Momentum Indicator (VC PMI) Weekly Update for January 3, 2019, with a focus on the silver and gold markets. The VC PMI uses artificial intelligence to analyze the markets, especially in relation to mean reversion trading (For more information on the VC PMI, please see below).

Silver

Courtesy: ema2trade.com

The silver market traded last at $15.7950, which was the close for today. As I write this report, I wanted to look at the silver market in relation to the report I published in Marketplace on December 28, 2018.

In that report, the market was trading at $15.44. We had a bullish trend momentum indicator and a bullish weekly price momentum indicator. The weekly trend momentum indicator was at $14.63, and the weekly price momentum indicator or the average price mean or equilibrium was at $14.75. With the market closing at $15.44, it closed above the mean, giving us a bullish indication as we came into this week. This meant we were preparing us to take profits. In the report, I said to exit longs at the two levels of the extreme above the mean at the sell 1 (S1) level of $15.89 and the sell 2 (S2) level of $15.94.

Reduce Your Long Exposure

So far today, the high has been $15.8150. We have been recommending to our subscribers to reduce their exposure in the gold and silver markets at these levels, since the VC PMI is identifying a level of supply that is aligning itself on the daily, weekly and monthly charts. When we get this type of alignment - when the three spreads are at even money or zero - it is usually an indication that the sequence of this individual structure is about to end. In other words, once we get an indication of the price coming down below the VC PMI S1 or S2 levels, it begins to indicate for us a high probability that a reversion to the mean is likely, particularly when all three trends align. This has been the observation of the VC PMI, which we have been running with TradeStation.

In this case, the VC PMI has identified a level of supply or what most traders call resistance, and what we want to see is the price action resolve this supply. Such a resolution would give us a direction for the price. If the supply up here is greater than the demand, then prices will come down and the artificial intelligence of the VC PMI would tell us clearly the levels at which this action would activate short signals. For now, the artificial intelligence is recommending that traders take profits in silver and gold at these levels and reduce your exposure to a comfortable level according to your size.

Wait for a New Equilibrium or Set-Up

Then look for the market to adjust back to the mean. Once we get a clear indication of the average price established once again or a new equilibrium, then we can once again extrapolate the new price structure with buy and sell levels below and above the average price. Right now, the VC PMI artificial intelligence system is recommending that you take profits, especially if we experience a spike or price high in the next couple of days.

The VC PMI Automated Algorithm

We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets"; "The Power of Mean Reversion in Factor-Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages, and momentum indicators. The science of Vedic Mathematics is used to combine these elements into a comprehensive, accurate, and highly predictive trading system.

Mean-reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it is between 90% and 95% probable that prices will revert back to the mean by the end of the trading session. I used this system to analyze the gold and silver markets.

Strengths and Weaknesses

The main strength of the VC PMI is the ability to identify a specific structure with price levels traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level, and the market closes above or below these extreme levels. The day trading program then confirms that a higher fractal in price has been identified and the market will move significantly higher, although the same principle applies if the market falls significantly. By the price closing above the S2 level, it indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.

The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly, and monthly.

The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly, or monthly average.

Disclaimer

The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: I am the Director of Research for the Equity Management Academy and wrote this article for the Academy.