When I was going through the price charts last night for the nightly Swing Trader’s Insight newsletter, the silver futures chart really jumped out at me. With all the volatility out there yesterday (off the charts volatility), silver had an inside day and closed with a doji. Additionally, there was a big range contraction from Wednesday-Thursday’s range was 63% of Wednesday. These patterns all indicated the lack of conviction on the part of traders.
Volatility tends to be cyclical. A period of low volatility is often followed by high volatility, so we can use these low volatility indicators to anticipate a jump in volatility.
This ends up fitting well with the Taylor Technique’s emphasis of the significance of the previous session high and low, but with a twist. For a ‘normal’ day in the TT cycle, we look at either the high or the low as a reference price. We look for a reversal through that reference price as the sign of a trend change and trigger for entry to follow the nascent trend.
When we have a range/volatility contraction, we anticipate the opposite-that a move through a support or resistance point will see follow through. This move often creates a positive feedback loop, as traders on the wrong side close out losing trades and other traders jump on the trend.
For and resistance points we use Taylor’s reference points of the previous session high and low. We look to either buy a break over the previous session high or under the previous session low as our entry trigger.
The daily chart for July silver futures is below. You can clearly see the contraction. It really jumped out at me when I was looking at all the other markets that made big directional moves, sticking out like a sore thumb. I added the Fibonacci retracement from Monday’s high to Wednesday’s low to give an idea for a profit target on a breakout rally. The April 12th high proved to be resistance on the last rally, so it would be a significant price level on the next up move.
click to enlarge
The 15 minute chart for today shows how it unfolded-sideways trading under Thursday’s high until a breakout at about 11 AM. A sharp rally followed, reaching the two price objectives within an hour. This sharp of a move is by no means anomalous for a breakout day trade. It is for this reason that it often pays to take a relatively quick profit-breakout moves tend to create the ‘excess’ that marks the end of a move.
click to enlarge
Breakout setups are generally easy to identify. They can result in a sharp move in a short period of time; exactly the type of trades that traders look for. This is one of the reasons I cover as many markets as I do for my Swing trader’s Insight service-a breakout move in silver or wheat or the British Pound can all yield productive trading. Watching a broad range of markets increases the odds of being able to recognize and exploit these moves.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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