It’s been a while since my last update. The last two updates were on the silver bubble as it was reaching a very overbought condition. At the time it seemed like the bubble would burst at any moment, but as is usually the case in an extremely overcrowded bullish market, the bubble burst very dramatically and quickly. My last couple of posts gave some clues but technical analysis will often either give false or late signals when this type of market finally falls apart, as was the case this time. One can usually find momentum divergences, and there were many during this run-up, but it is usually not a good idea to act on these when a market goes into its parabolic blow-off. I find the adaptive CCI (in the middle sub-graph) to be helpful in determining if a market is trending too strongly to fight a trend. In this case by time this indicator fell under the 100 reference line to indicate the market was no longer trending (the upper cyan dashed line) the market had already collapsed. Taking a shot at the downside in a parabolic uptrend is very risky and usually success is either a matter of luck or of deep pockets combined with perseverance. Most traders give up after a succession of losses just at the time when the trade would have worked out.
One technique to attempt to profit from these types of markets is to use options and do a put back spread. The above chart shows a trade that would profit if the market dropped dramatically, and would still profit slightly if the market continued to advance. The only area of loss would occur if the market stopped moving and just went sideways over a few days or weeks. But often when a market has an exponential blow-off the market will either continue the parabolic advance or will stage a dramatic reversal to the downside. Of course the market can do whatever it wants and it is possible to have a parabolic up-move followed by a flat trend, which would produce a losing trade with a back spread, but it seems more likely that the market will move one way or the other. The back spread in the above example is simply a short put option slightly above the money, and going long twice as many puts a few strike below the money. Of course this trade could be done with a bias toward the other direction by reversing the spread and doing calls instead of puts.
This is a specific type of trade to do during a specific type of market action. Just to be clear, I’m not in any way suggesting this type of trade after a bubble bursts or during more normal or range bound markets. It is only a tool to keep in mind when a market has a speculative bubble such as was the case in silver recently, or another type of unusual movement. This information is for educational purposes only and no trade recommendation is implied or should be inferred.
Now that the uptrend in silver has been broken it would be normal to expect rallies up to resistance. But where is resistance? It is difficult to find logical reference points when the previous uptrend was of a parabolic nature. I will be watching the moving average (darker blue line in SLV chart above) for a clue. There is no magic in the formula for this moving average, but it does attempt to adapt to the current cycle of the market and offers a good reference point when there are few other clues.