Metals Momentum
Volume Interpretation
I hope you had a Happy Thanksgiving. With US markets having a shortened week, there is naturally going to be less volume than we would see in a full trading week. With all trading vehicles, if you are dealing with a speculative and price changing market, it is important to take volume and open interest into consideration. Volume helps us to understand liquidity available in a market and whether or not a crowd is behind price movements. As a personal rule, I am generally wary of exaggerated price movement in a volume-shortened week.
When dealing with futures markets, there are other things to take into consideration, such as trader’s rolling out of a spot month prior to expiration and moving into the next liquid contract. This can be demonstrated in this last week simply by comparing the Dec 2011 Silver with the Mar 2012.
(Silver, Dec 2012)
(Silver, Mar 2012)
While the price movements are virtually identical, the volume and open interest tell opposing stories, both decreased in the spot contract while increasing in the March 2012. While shortened Holiday trading certainly contributed to the decrease in the spot month, we must also take expiration into consideration which is clearly demonstrated in March’s increase.
The bottom line for me is, the question of why a market is doing something is less important than understanding what it’s doing and how to respond to it. On that note, it is therefore important to take both charts into consideration with respect to trading. Clearly, silver is in a period of consolidation and congestion with a tighter price range than it has experienced in the past year. Lowering volume and lowering open interest during a tight period of consolidation is usually indicative of a break out. Both market months agree that there has been a recent spike in volume on down days with drops in volume on the up days. Silver also closed very close to low of the day, only $.10 higher than it’s low of the day and week. Not a very good sign if you are a long buyer right now.
The purpose of this article is not to predict what prices are going to do from here, but to try to read the signs of what it’s doing and encourage preparation in the case that certain market conditions are met. In this case, your actions should be reflective of your personal strategy. If you have the means to steadily accumulate regardless of price and are a long-term bull that does not need to take price swings into consideration, your strategy is different than if you have limited risk available to you. You need to know how much you are willing to put at risk or where your risk tolerance limits are whenever you are in any type of trading market or financial vehicle that involves price fluctuations. If I were long, I would be selling and going short if silver confirmed a break out of it’s trading range to the downside with a buy stop a little over $31. A long position should hope for a bounce between here and $30 with continued consolidation between $30 - $35/oz. The longer the consolidation, the more strength it’s showing at these levels and the higher likelihood of a market breakout to the upside.
Know one can knows for sure what the market is going to do or which direction it is going to break out of. I believe there are a number of signs that show an increased likelihood of a breakout to the downside and the market going lower before it goes higher. Be prepared either way. Best of Luck to you!
Adam Laigo
Twitter: @PrcsMtlsGuy
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