Monday, September 10, 2007

Rollover Day Approaches

As Silver toys with it's 50 day moving average here, our thoughts wander to the September/December future contract rollover window that opens at 9:30AM est on Thursday the 13th. As if next Tuesday's Fed meeting isn't enough to think about.

Quick Facts about Rollover Day
The following applies to many (if not most) futures contracts especially those from the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT).

  • Rollover is 8 days before expiration.

  • Expiration is the third Friday of each quarter month (March, June, September, December)

  • The contract letter associated with each month is: March=H June=M September=U December=Z

  • Rollover is on a Thursday.

  • Rollover is usually on the second Thursday of the month but will be on the first Thursday if the first day of the month falls on a Friday

  • Volume shifts to the new contract at market open (09:30 EST) on Rollover day

  • New day trading or swing trading positions opened on rollover day should use the new contract month irrespective of when you plan to close it.

  • New swing positions might be better opened using the new contract if opened within a few days of rollover day.

  • Market myths abound at rollover and expiration. Check the source and confirm the probabilities before believing anything

Rollover day is when we switch from trading the contract that will expire this quarter to the contract that will expire the following quarter.

The general rule here is that you want to get into the next contract as liquidity moves from one to the other. At this point in time (09:30 EST on rollover day) the spreads will be tightest and you will lose the least amount on the spread as you switch contracts. This is especially important for swing and longer term traders that may want to carry their positions past the expiry date.

Some observations of my own regarding "rollover day":

In September of 2005, Silver prices on "rollover day" were below prices on the previous quarters rollover in June 2005. Silver prices rose thru and following "rollover day" in September 2005.

September 2006, Silver prices were substantially above prices on the previous quarters rollover in June 2006. Silver prices fell thru and following "rollover day" in September 2006.

It's now September 2007, and Silver prices remain below prices of the previous quarters rollover in June 2007. Will Silver prices continue to rise through and following this Thursday's "rollover day"?

I have repeatedly referred to Silver's consolidation in 2005 of prices over $8 set in late 2004 and their similarity to Silver's consolidation of it's May 2006 highs over $15 in 2007. In September 2005 Silver was recovering from a late August price washout and was attempting to regain control of it's 50 day moving average just prior to "rollover day". Here were are today, September 2007, and Silver is recovering from a late August price washout again, and trying to recover it's 50 day moving average just prior to "rollover day".

I know, crazy isn't it? But look whats on the horizon should history repeat itself here in September 2007. Throw in a little "medicine" from the Fed in the form of a Fed Funds rate cut, and Silver may well be setting up for that trip to the moon so often dreamed of.

Silver must first regain a bullish posture above it's 50 day moving average, and survive Thursday's contract "rollover". It must then break the downtrend line from February's high and close three straight days above 12.97 . If Silver can achieve this tall order AND the Fed cuts it's Fed Funds rate, then Silver may actually be poised to break orbit and head for the Moon.

If this scenario plays out, I would expect Silver to run up into mid October 2007, pause, take out the May 2006 high in mid-November 2007 and continue higher until the "contract rollover" in December 2007.

Just some observations and thoughts about Silver on September 10th, 2007... on the eve of the September/December 2007 quarterly futures contract "rollover".

May the Force be with you...

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