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Option Skew Points to More Downside Potential in the Nasdaq

By now it is no secret that equity markets continue to deliver solid gains for 2014. In fact, all of the major U.S. domestic stock market indexes are higher for the year. U.S. equities have benefited from an accommodating Federal Reserve, massive corporate stock buy-back plans, and solid earnings growth. The bullish trend which began in early 2009 has pushed equity indexes to several all-time highs.

However, when we focus our attention on 2014 one index is showing major relative out performance. The Nasdaq Composite and the Nasdaq 100 indexes have blown away every other major index in terms of overall returns in 2014. The chart shown below illustrates the returns of each major U.S. equity index year-to-date.

Chart1

As can be seen above, when looking at the corresponding ETF for each major index, the Nasdaq 100 (QQQ) is running away from every other major index in terms of performance. As a contrarian trader, I am of the opinion that now may be an excellent time to consider looking for a possible short position to hedge against the bullish trend.

The equity markets in the United States are becoming frothy and prices are at the very least fair valued if not overvalued depending on which methods are used to calculate current prices. When we consider the major out performance in the Nasdaq 100 Index, it would only make sense that if we see downside in the future we could capture some big potential profits.

As an option trader who focuses primarily on probabilities for trade executions using a variety of implied volatility calculations and Delta assumptions, the following observations regarding the Nasdaq 100 Cash Index (NDX) were derived based on data points on Friday, August 29th.

Based on the September NDX option expiration date, the current skew in the NDX option data is to the downside. In fact, as I am typing this NDX is trading around 4,075. A 2 standard deviation move to the upside (90%) is around the 4,200 call strike and the same measurement to the downside is around the 3,900 put strike.

Chart2

When looking at the same data based on the October NDX option expiration date, the current skew in the NDX option data demonstrates more aggressive downside Skew in October versus September. A 2    standard deviation move in the October series to the upside (90%) is around the 4,275 call strike and the same measurement to the downside is around the 3,755 put strike.

Chart3

While I realize this is somewhat technical, the main premise is that the option market in the Nasdaq 100 Cash Index (NDX) is skewed toward more potential downside risk. This data lead me to place a new trade earlier this week which was next short the Nasdaq 100 Cash Index (NDX) using an October Call Credit Spread as a trade structure.

Recent results for the service have been very strong for the options alert service. The last 4 trades have produced a 13.95% winner in Matador Resources (MTDR), a 17.05% winner in the S&P 500 Cash Index (SPX), a small 1% loss in the Nasdaq 100 (QQQ), and a 21.95% in the Russell 2000 Cash Index  (RUT). The options newsletter service is priced super affordable at just $29.99 per month with new trade alerts sent out almost daily.

Ultimately time will tell if the skew in the NDX proves to work. For now, I like the near 75% probability of success that the NDX Call Credit Spread is offering with a nearly 20% potential return. In the future readers can expect a recap of this trade. Happy Trading!

Chris Vermeulen
www.thetechnicaltraders.com/options/

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Gold and Oil on the Verge of Something Big – Hero’s Rarely Win

Everyone has been calling for a bottom in Gold the last year. But the fact is that gold and gold stocks are still clearly in a bear market. Just look at the 200 day moving averages. The previous trends were down and prices have been moving sideways for the past year.

A lot of newsletter and analysts are calling a bottom. Technically it’s just a consolidation pattern. Consolidation patterns are a continuation pattern, meaning if the previous trend was down, which it was from 2011 till now, the odds favor price will continue lower after this consolidation.

goldbear

If this consolidation does happen to be the bottom then we can classify it as a stage I base. Gold and gold stocks will start a new bull market, but price needs to break to the upside of this consolidation pattern. Until it breaks to the upside, it is still in a down trend.

Gold topped out over three years ago. And I am in no rush to try to pick a bottom and be a hero here. I’m just going to continue waiting on the sidelines until price confirms either a new bull market has started or for price to breakdown and we get another leg lower.

 

Oil Outlook

Taking a look at the big picture of crude oil the chart looks bearish. It too has been trading in a range since 2011 and the price is nearing the apex of a consolidation pattern.

oilbear

It’s important to know that a pennant formation which is what crude oil has formed are the most predictable when price breaks out of the pattern within the first 1/3rd of the formation.

The longer price consolidates and gets squeezed into the narrowing apex of the pennant pattern, the more unreliable. The trend breakout will be, and it becomes at best a 50/50 bet.

Crude oil’s previous trend was up, but it’s been consolidating for such a long time that price is now squeezed into the apex. This negates that bias for the previous trend to hold true so we have no idea which why it will breakout but when it does expect an explosive move.

A breakdown in crude oil will send price to the $70 or $75 per barrel range, and that will hammer on the Canadian dollar also. I can see $1 USD being equivalent to $1.20 Canadian in a year.

My Gold and Oil Conclusion

Looking at the US dollar, it has been rising partly due to the euro falling. This strong dollar will put a downward pressure on commodities overall.

Automated Trading System

Gold and oil have not been that exciting for investors since 2011 when they topped out, but both are setting up for massive moves that should last month, if not year or more. Once these new trends emerge expect to see them in the headline news every hour.

It does not matter which way these commodities breakout of the consolidation patterns. With the dollar continuing to rise and the bearish chart patterns for both gold and oil there is a good chance much lower prices are ahead.

This will catch most investor’s off guard. It’s human nature to try to predict tops and bottoms in the market. But this is why most investors get caught on the wrong side of the market. The market always has a way of catching the majority of people on the wrong side of a position.

I am happily sitting in cash with some of my investment capital waiting for gold and oil to breakout of these large patterns. I would not be surprised if we see $900 gold, gold stocks like the gold bugs index $HUI to be at $150, and $70 per barrel for crude oil. I am not saying this is what I want, but you should be mentally prepared so you can get back into cash position and so you can take advantage of falling prices with me.

Big money will be made on the next price movements in these commodities. Whether we have to go long the market or short sell the market. Either way, we can make money. So don’t be a hero and try to pick a top or bottom, just wait for confirmed breakout then invest with the trend.

Would you like my trade alerts CLICK HERE

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Charting your way to financial freedom,

Chris Vermeulen

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How to make money from uncertainty

If you have been struggling with your trading the past few months with most of your stocks losing value as the broad market continues to make new highs, you are not alone. There is a common reason why your individual stocks have been up so hard the past two months and I will tell you why in the next educational trading video I send you next week.
 
In the mean time subscribers of TheGoldAndOilGuy Newsletter pocketed 6.3% on our EDV bond ETF last week. We still hold a core position but the easy money in that asset class has now been made.
 
See Chart Below:

 
Become a more educated and consistent trader with my trade alert newsletter: www.TheGoldAndOilGuy.com

Sincerely,
Chris Vermeulen
www.TheGoldAndOilGuy.com
www.AlgoTrades.net

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Quantitative Trading XLU – Utility Stocks Will Continue to Outperform

See this weeks XLU trade setup and how I use fibonacci extensions for my price targets in the video below.

Also, I posted an exclusive article with my updated quantitative trading gold forecast.

START QUANTITATIVE TRADING WITH ME TODAY!
Click Here

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Silver Forecast and Prediction of Silver Stocks

Silver Forecast WebsiteSilver forecast shows you the critical line in the sand that silver must hold if the new bull market is to start in the near future. If silver can find support here then I predict silver to rally and break out of its basing pattern in the next 2-3 months.

Silver Forecast & Equities Prediction

In this article I show you how to read and trade using trend lines. Most individuals trade trend lines incorrectly and my example is using the US Dollar index chart which is one of the main points why my silver forecast is bullish.

Silver remains is a downtrend or basing phase at this point, but some big price action is just around the corner. Silver traders and investors should be aware that if silver breaks below its sell support zone it could be in for a world of hurt…

Silver and gold mining stocks are in a similar position but we are seeing bullish divergence when comparing the gold miners bullish percent index to the GDX etf. This is pointing to higher price for silver and gold stocks. Keep in mind that divergence is an early warning indicator and trades should not be traded based upon that alone.

Read my: Silver Forecast

If you have not yet read my gold forecast read it now: Gold Forecast

Chris Vermeulen

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Gold Forecast & How To Momentum Trade Gold Stocks

Gold Forecast PredictionBack on April 9th I posted a short tutorial on how to momentum trade gold along with my short term gold forecast.

Today I wanted to do a follow up video for my gold market traders for three reasons:

1. I had lots of great feedback from traders taking advantage of what I showed to profit in the past week.

2. To show you how and why this strategy works better with gold stocks and silver stocks.

3. To provide my short term gold forecast so you are on the right side of the market for next week.

4. Also you should see my major long term Gold Forecast

Get My Gold Forecast & Gold Trade Alerts: www.TheGoldAndOilGuy.com

Chris Vermeulen

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Gold Forecast – This Is Going To Be Exciting

Gold Forecast Gold EagleGold Forecast: During the past year there has been very little talk about gold, silver or gold stocks in the media. Yet the year before it was all the media could talk about and they even had the price of gold streaming live all day in the corner of the tv monitor.

I am always amazed how the masses and media can be so off in their timing of the stock market and commodities in general. For example when Greece was having issues in 2012 and everyone was avoiding investments in that country like it was the plague. Looking back now, Greece is up huge and only recently investors are confident enough to put money into the Greek stock market again.

But the truth is that big move has already happend, and the US and global markets are in rotation (changing trends). Money is slowly shifting from what has been hot during the past year or two, to new investments which have a lot more room to rise in value. And this is leads us back to my gold forecast.

If you are at all familiar with Stan Weinstein’s work, then you understand the four market stages. If not, you can learn these four stages on my Stan Weinstein page.  Through stage analysis we can predict the type of price action we should expected and have a rough idea just how long a move (new trend) is likely to last. It is important to know that Stan Weinstein’s stage analysis works on any time frame from a one minute chart to a monthly chart. If you do not know this then you are trading almost blind without a doubt.

Current stage analysis looks as though the US stock market may be starting to form a stage three top. There are several indicators and market behaviors which are screaming, telling us to trade with caution to the long side. But the masses do not see this or hear what is unfolding in front of their very own eyes, and that I fine. It actually reminds me of a funny old movie called “hear no evil, see no evil”.

In short, the market is showing some signs of distribution selling in stocks, and the once market leaders are now getting completely crushed with heavy selling volume like the biotech stocks, social media stocks and other momentum stocks and this is bad.

Gold on the other had has been forming a stage one basing pattern. This provides a very bullish long term gold forecast that investors could ride for several years.

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Q: Where Will Investment Capital Go During The Next Bear Market In stocks?

A: One of the places will be precious metals. Click here for my gold forecast which shows the main reason why

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Gold Forecast Coles Notes:

1. The US dollar index has setup a massive stage 3 topping pattern on the weekly chart. A falling dollar will send the price of gold higher naturally.

2. Bullish gold forecasts by the media have dropped substantially, meaning everyone is bearish on gold.

3. Gold stocks are already showing signs of massive accumulation. I always use the price and volume action of gold stocks to help create and time my gold forecasts which it starting to look bullish.

Gold Forecast Conclusion:

Gold market traders should understand that precious metals in general are still months away from breaking out to the upside and starting a new bull market. Do not be in a rush to buy gold or gold stocks yet. There will be plenty of time folks.

Get My Daily Video Gold Forecast & Gold Trading Alerts at: www.TheGoldAndOilGuy.com

Chris Vermeulen

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How to Trade Gold – Gold ETF Trading Newsletter

I did a short video a while back on momentum trading gold and wanted to share it and post it in the members area of the website for you to view. It’s short and basic, but useful.

Current snap shot of gold trend…

Gold - ETF Trading Newsletter

 

Learn More & Trade With My Alerts with my ETF Trading Newsletter

Chris Vermeulen

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SP500 ETF Trading Strategies & Plan of Attack for This Week

Index ETF Trading Strategies: Stocks have kick started this week with a 0.85% pop in price but the big question is if the market can hold up. Last week stocks repeatedly gap higher and sold off with strong volume telling us that institutions are slowing phasing out of stocks (distribution selling) unloading shares into strength and passing them onto the a average investor to be left holding bag.

I want to show you a couple charts which show the price action, volume and money flow of the SP500 so you have a visual of what I am talking about.

30 Minute Intraday SP500 Chart – ETF Trading Strategies

In the chart below you can see the price gaps followed by selling. Why is this important? It is important because during a down trend the market makers and big money plays who have the money and tools to manipulate the markets will allow the market drift higher or they will run price up in overnight or premarket trading when volume is light. Once the 9:30am ET opening bell rings volume and liquidity spike which allows the big money player to sell remaining long positions and or add to short positions they have.

If you look at the blue on balance volume line at the bottom of the chart you can clearly see that more contracts are being sold than bought which is typically an early warning sign that the market is about to fall farther.

ETF Trading Strategies

 

Automated Trading System – 30 Minute ES Futures Chart

Below is a marked up screen shot of my automated trading system which I use for timing both futures and ETF trading strategies. The color coded bars tell you the market trend along with the strength of buyers and sellers.

When you couple market cycles, trends, volume/money flow, along with chart patterns we can forecast and trade markets with a high degree of accuracy in terms of market direction and timing. Ross Clark & I talk about cycle analysis, market stages etc… which you can listen to live here: http://talkdigitalnetwork.com/2014/03/this-week-in-money-129/

Automated Trading Systems

 

My Index ETF Trading Strategies Conclusion:

My Personal Trading Strategies Book

Just to be clear on the current market trend and my overall outlook let me explain a little more. Overall, the broad stock market remains in an uptrend. Thursday and Friday of last week we started getting orange bars on the chart telling us that cycles, volume, and momentum are now neutral. It’s 50/50 on which way the market will go from here, so until the market internals (cycles, volume, breadth) push the odds in our favor enough for a short sell trade or a new long entry we will not add new positions to our portfolio.

It is important to understand that nearly 75% of stocks/investments move with the broad market. So we don’t want to add more long positions when the odds are not in favor of higher prices. Trading in general is not hard to do, but creating, following, executing properly money and position management is. If you have trouble with following or creating an ETF trading strategy you can have my ETF trading system for rising, falling and sideways markets traded automatically in your trading account.

Learn more here about my Automated Trading Systems

Chris Vermeulen
www.TheGoldAndOilGuy.com
www.AlgoTrades.net

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Gold Forecast & Fresh Good News!!

Watch here to learn more about my improved gold forecast and etf newsletter…

 

Also You may want to see these three new long term investment plays:
http://www.thegoldandoilguy.com/next-three-bull-markets-starting/

 

And my unique way to gauge the market strength:
http://www.thegoldandoilguy.com/gm-gs-xom-broad-market-trading-strategy/

 

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