Interesting is the situation in Gold and Silver during the first trading week of the new year. A huge down day on Friday in both instruments. Looks like the precious metals are going to break out the down side of our screens. But is it really that bad? Let's look.
From the chart above we see that decline came in a period when the seasonal indicator (bottom pane) is suggesting a rise. Also, if you look at the green line above the chart, you'll see that no matter the big fall the On Balance Volume has not registered distribution. And let's not forget that volume spike that appeared on Friday.
From a price action perspective, such a big down day means that lot of emotions in play. And in markets, the emotional actions are the wrong ones. BLB shape we saw in Gold suggests a move in the opposite direction in more than 60% of the cases. It is even better in Silver where that shape is a Big No Tail. Also Silver is comparatively stronger than Gold.
All this suggest a possible mean-reversion trade here, Silver to be preferred. The first target would be the middle of the down move (all three days).
But where would be the stop-loss? All the levels we could consider for the stop are way below Friday's close. Using such a stop won't give us even 1:1 Risk-Reward. So we need more bars to judge that. For Monday the most probable bars are either an up Long Tail or an inside bar.
Based on where the market will present us with a good stop-loss level we'll have to judge is the signal worth taking. The best would be to wait for a higher short-term and then look for long signals.
The down opportunity presented in the picture above doesn't have the support outside of the chart but I am showing it because of the message the price action is giving. Multiple breaks of both highs and lows but in the end, the candlestick ends black (down) suggests to me that those instruments are ready for a short-term move down. Will be looking for signals.
Founder of Piece of Trading
Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, ireallytrade.com. Charts made with TradeStation®. tradestation.com
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