Silver Futures Look Explosive

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau for ETF Digest

NEW YORK ( ETF Digest) -- The chart of silver futures is creating a combustion-like chamber for a sharp move one way or the other, and the longer it takes to resolve, the more explosive it becomes.

Why is this the case?

The bottom line is that futures are a zero-sum game. Everyone who is on the wrong side of all this volume/open interest of the past five days and has been putting on a swing trade is going to be wrong on a breakout or a breakdown.

When they close out their losses, the good traders will pile on to deliver more pain.

Typically when this happens, we get a move that is twice the distance of the consolidation range in a fraction of the time it took to form it.

Which way will it go? I have no idea. But as a trader I know I would not want to be on the wrong side of the initiative move or break from the extremes of this balance area during the Comex session.

In my opinion, from an auction market perspective, any position trades placed inside the balance area are guessing or relying on luck in the daily time frame. And that doesn't last very long in the business of trading.

What is a balance area? A balance area is where the market has clearly found value in a particular time frame due to the tremendous trade facilitation taking place within the price range.

Markets move from balance to imbalance.

Imbalance is caused when market orders come in and there are not enough offers or bids to meet that supply or demand, increasing volatility (scaring the heck out of those in the red).

There may also be large and increasing market orders to close out losing positions of the weak-handed open interest when the auction takes price away from value. It takes strong hands to cap those moves, and that is what sets up the responsive move, a.k.a. the reversal.

Supply and demand determine price. In order to make it as a trader I know I have to only look at the probabilities of an increase or decrease in either one and apply the appropriate strategy.

Although I prefer to stay with the prior trend, what has me biased or leaning toward the responsive "trade" in silver after a failed breakdown is that the open interest has been declining more than 10% since the beginning of September, and the Commercials have been decreasing their net short position.

I am also looking to get long for a trade on a breakout as well, and keep my stop below what is known as the Point of Control or High Volume Node in the balance area that is forming. This would make my trade invalidated if the stop loss gets executed.

The loss is acceptable because the initial reward is a multiple of the risk with favorable enough probabilities for an increase in demand. I would take that same setup again and again and again, which leads to a trading system with positive expectancy over time.

In full disclosure, I have been long silver futures from $18.25.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.