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BREAKOUTS


MmM Pattern Breakout In December Silver Sends The Precious Metal Higher

09/26/07 10:24:47 AM
by David Penn

A confirmed close serves as confirmation for a BOSO setup to the upside as well as a similarly bullish setup in the MACD histogram.

Security:   SIZ7
Position:   N/A

I wanted to point out another situation in which following MACD histogram patterns in bases and consolidations can be one way to establish a position in a market before it breaks out. Because the entry requirements for taking MACD histogram pattern trades require a confirming close, traders can take some solace in the fact that whether or not the market breaks out, potentially providing a trading windfall, the market's confirming close indicates the ability to move in the desired direction. In this sense, the breakout is almost a bonus.

Almost. Because as those who are long the stock market the day before it made its recent 300-plus rally will attest, there is nothing like being strapped in and ready to go when the rocket does blast off.

FIGURE 1: SILVER, DECEMBER FUTURES, DAILY. A bullish MmM pattern in the MACD histogram helps position silver traders for a breakout days later.
Graphic provided by: Prophet Financial, Inc.
 
Here, the first sign of a potential long trade came in the form of the stochastic oscillator going overbought on September 11. This kind of BOSO breakout (see my October 5, 2005, Working-Money.com article for more on this setup) always draws my attention. Often the best time to buy a market is just as it is becoming overbought, contrary to much-received wisdom that often encourages traders to panic when markets move into overbought territory.

All that is required to pursue a BOSO long is a confirming close. By that, I mean a close above the high of the session when the market first became overbought. In the case of December silver in the first half of September, this meant a close above the high of September 11, or approximately 12.95.


In the days following the BOSO long signal on September 11, the MACD histogram developed a bullish signal of its own. The signal here was a MmM pattern in the MACD histogram, a signal made valid by the market's close above the 50-day exponential moving average (EMA) by the time the pattern was completed.

The MmM terminology (see my pair of articles discussing these and other MACD histogram patterns in Working-Money.com, "Trading The MACD Histogram, Part I" and "Trading The MACD Histogram, Part II" from December 6 and December 29, 2006, respectively) refers to the shape of the histogram when the pattern is fully developed.


The MmM pattern is formed when the bars of the MACD histogram go from high to lower and back to higher. Numerically, in the case of December silver in Figure 1, the histogram values shifted from 14.43 to 12.89 to 12.90. The shift from 12.89 to 12.90 from September 14 to September 17, small as it is was, was nevertheless all that was necessary to trigger a MACD histogram MmM buy signal. All that is required to confirm the signal — just as with the BOSO signal days before — was a confirming close above the high of the session during which the signal was made.

As happens sometimes, the confirming close for both the BOSO breakout and the MmM pattern occurred on the same day, September 19, at 13.105. This close cleared both the highs of September 11 (the BOSO signal day) and September 17 (the MmM pattern completion signal day).

The very next day, the market for December silver was trading as high as 13.64. That overnight 53–54- cent gain was worth more than $2,500 per contract to properly positioned traders.




David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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