The chart below tells an interesting story as to how silver has been developing moves.
Let’s first get you to understand Bollinger Bands, the dashed black lines on the below chart.
Definition of Bollinger Bands:
John Bollinger, the inventor of these bands writes on his webpage that he “settled on the formulation we know today, an n period moving average with bands drawn above and below at intervals determined by a multiple of standard deviation (We use the population calculation for standard deviation). The defaults today are the same as they were 35 years ago, 20 periods for the moving average with the bands set at plus and minus two standard deviations of the same data used for the average.”
Simply put, it’s a series of bands, an algorithm that is used in many ways. I prefer to look at the top band as “initial” as resistance and bottom band as initial “support “.
It doesn’t matter to me if a slope or sideways action is what type of chart pattern precludes the band being hit. Once a slope develops I think of the band more as a channel, with the lower band being projected support and upper band projected resistance.
The longer the market goes sideways, the more endurance the price breakout can have both in price and length of time the breakout lasts. The shorter the time of sideways action, the more muted the eventual breakout action.
A key function of Bollinger Bands is that 95% of the time the markets will trade within the bands, helping to tell traders if price is getting ahead of itself to the upside or downside.
As you can see, each time the market has gone sideways, shown as the highlighted area, the market ends up breaking out. As the amount of sideways action shortens, its not unusual for the resulting breakout, in terms of both price and duration of the move to also shorten.
The current sideways action is very long. At the same time the Bollinger Bands are narrowing in as well, not staying as wide apart they were on previous moves. Remember that each bar represents one week with this current consolidation phase on the Weekly Chart having begun in early 2017.
This leaves us with the question of which direction the eventual price breakout will be and how far it might go. If down, the 14.00 level is a likely target. If up, the first resistance is close to 19.00.
How to position yourself
On a close under 15.90, you might consider a purchase of a 14.00 Put. On a close over 16.25, consider a 19.00 Call. Once you enter, consider writing a further out of the money Put if you bought a Put or writing a further out of the money Call if you bought a Call. By doing so, you will cut down the amount of risk and cost of the original Put or Call while allowing participation via the breakout.
In between these two point I will issue futures trades as they present themselves. Those trade will NOT be off Weekly Chart formation, they will be off Daily Chart formation.
Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of Linn & Associates or Linn & Associates LLC that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.
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