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Member’s Pocketed 5% on Natural Gas Bounce with Signature Candle & Volume Pattern

During the last couple weeks the SP500 index has been taking a beating leaving many traders left holding the bag at high prices.

Fortunately, I cover several different investments so we when one is not giving us a trade, another one should be.

Taking a look at the technical analyst trading charts below you will see how a simple reversal candle coupled with volume can generate low risk and highly effective trades that move in your favor quickly.

natgastrade

If you want to learn how to read and trade the charts like a pro, be sure to join my daily video analysis newsletter which is jam packed with trading education and tradable ideas each day.

Join Today! www.TheGoldAndOilGuy.com

 

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Precious Metals & Miners Flash Short-Sell Signal

It has been a bumpy ride for precious metal investors over the past couple of years and it unfortunately I do not think its over just yet.

The good news is that the bottom has likely been put in for gold, silver and gold miners BUT the recent rally in these metals and miner looks to be coming to an end. While we could see another pop in price over the next week or so the price, volume and momentum see to be stalling out.

What does this mean? It means we should expect short term weakness and lower prices over the next month or two.

Below are three charts I posted several months ago on my free stockcharts list. These forecast were based off simple technical analysis using cycles, Fibonacci and price patterns. As you can see we are not trading at my key pivot level which I expect selling pressure to start to increase and eventually overpower the buyers sending the prices lower.

 

Gold Trading Weekly Chart:

Here you can see that gold is technically in a bear market when viewing it on the weekly chart. If you were to pull up a daily chart you would likely notice how the price of gold is trading at a key resistance level on the chart and has reached its full flag measured move.

What does this mean? It means the odds are pointing to lower prices for gold in the next few weeks. Keep in mind though I do feel as though a major bottom has been put in place for the precious metals sector. So buyers are likely to step back in around the $1300 area.

goldoverbought

 

Silver Trading Weekly Chart:

Silver has a little bit different looking chart but the same analysis applies here as it did in gold.

silveroverbought

 

Gold Miners Trading Monthly Chart:

Gold miners may have bottomed on this monthly investing timeframe chart but the daily chart which you will see next clearly shows short term weakness has started.

GDXLongtermBottom

 

Gold Miners Trading Daily Chart:

This daily chart really shows my thinking for miners and the overall precious metals sector as a whole. The recent weakness in gold miners to the down side point to distribution of shares. This is very negative for the price of physical gold and silver as gold mining stocks tend to lead physical metals.

The yellow box shows a possible major stage 1 basing pattern forming. If this is the case, then we will have a great opportunity in the coming months when the precious metals down trend completes a reversal and start heading higher.

gdxoverbought

 

How to Trade Precious Metals & Gold Miners Conclusion:

In short, I think that staying in cash or shorting metals is the play for the next couple weeks. After that anything can happen and until price breaks down or finally completes the basing pattern and confirms a market bottom I would be very cautious trading here.

In the last week members of my trading newsletter took profits on our short SP500 trade and we closed a long trade in natural gas for a quick 6.5% gain. Join our community of traders and have your money on the right side of the market!

Chris Vermeulen
www.GoldAndOilGuy.com

 

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SellOff in Stocks Gives Us Some High Probability Setups

Find out what the SP500, Gold, Silver, Miners, Bonds, Oil and Nat Gas Are Setting Up For!

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Silver at Multi-Month High

The price of silver reached a 5-month high this past week as investor interest seems to have been rekindled in both gold and silver as belief in financial markets increases that the latest round of monetary easing from the Federal Reserve – QE3 – will soon be on its way. Many investors had largely stayed away from silver in recent months after some had got caught up in its volatility. Silver had touched a 30-year high in April 2011 before plunging 35 percent in a few short weeks.

Now the volatility is back – but on the upside – as prices have climbed more than 20 percent in less than a month. The gains have outpaced that of gold which rose roughly 10 percent during the same time frame. Importantly for investors, the ratio between the two precious metals has moved about 10 percent in silver’s favor since mid-August. This is the first time silver has outperformed gold since the start of 2012.

For non-futures investors, the two precious metals can easily be tracked through the use of exchange traded funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust (NYSE Arca: SLV) and the SPDR Gold Shares (NYSE Arca: GLD) respectively.

Silver Bullion Spot Price

Gold Bullion Spot Price

You can take a look at my long term outlook analysis from last week here: http://www.thetechnicaltraders.com/gold-standard-to-be-reinstated-through-the-back-door/

Some may wonder why has silver outperformed gold in the past several weeks? The answer goes deeper than just confidence that QE3 is coming soon, but it is still rather a simple one. The sharp rally in silver was fueled largely by short-covering. That is, some investors (hedge funds, etc.) had made rather large bets that silver would continue falling and were caught off-guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short-covering since May 2011. At the same time. Bloomberg reported that hedge funds were the least bullish on silver in almost four years.

It is unknown for how long silver will outperform gold. But even some long-term fundamental investors such as legendary commodities investor Jim Rogers has said that he believes silver right now is a better investment than gold. He points to the fact that historically gold has been worth about 12 to 15 times what silver is worth, but that recently it has been worth roughly 50 times silver’s value. Silver is also the only major commodity not to have reached a new all-time high in the decade-long commodity bull market and is still cheaper than it was 32 years ago.

So it may be worth a look. But since silver is so volatile, wait for a downward spike before initiating or adding to a long position.

If you would like to get my weekly analysis on precious metals
and the board market join my free newsletter at www.TheGoldAndOilGuy.com

Chris Vermeulen

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Gold Standard To Be Reinstated Through The Back Door

For the first time in over 30 years, talk of a return to the gold standard has become part of mainstream politics in the United States. Part of the official Republican policy adopted it at the recent Republican Convention and called for the commission to look at reestablishing the link between gold and the U.S. dollar. No doubt that plank was added to soothe supporters of Texas Congressman Ron Paul.

However, gold bugs holding gold bullion or even those holding gold ETFs such as the SPDR Gold Shares (NYSE: GLD) shouldn’t hold their breath in anticipation of the gold standard returning. There was a similar commission – the Gold Commission – set up in 1981 by President Ronald Reagan. After a lot of ‘commissioning’, the decision was made to go with the status quo of using fiat Federal Reserve dollars.

Any commission set up under the current president would likely come to the same conclusion. There are simply too many practical obstacles to return to a full-fledged gold standard. Even pro-gold advocates including the World Gold Council and the Gold Anti-Trust Action Committee (GATA) don’t see a gold standard returning.

The key problem would be at what price of gold would the United States peg its currency. Great Britain returned to the gold standard in 1925, after going off it in 1914, at the 1914 peg price. This was a mistake made by Winston Churchill (he called it the biggest he ever made) since it basically ignored the vast inflation in the British pound in those intervening years. The result was a vast overvaluation of the pound and deflation and high unemployment soon followed.

What price would a new Gold Commission set as the “correct” price of the U.S. dollar versus gold? $1,000? $2,000? $5,000? The answer is that there is no “correct” price. Whatever price is set will eventually be tested by the financial markets and fail much as the pegged currencies system failed. So there will be no return to the gold standard.

But that does not mean there will not be a ‘back-door’ gold standard. The move to such as a system is already underway as central banks all over the world are rebuilding their stockpiles of gold. After two decades of heavy selling, central banks became net buyers of gold in 2010 and the momentum has built since. Gold will likely end up being used as ‘good’ collateral by global central banks, as opposed to the shaky collateral sovereign bonds are turning into.

Central bank purchases, led by the emerging markets, are on track this year to hit a record high according to the World Gold Council. China alone in 2011 bought around 490 tons of gold. Other countries including Russia, Turkey and South Korea have added gold to their official holdings in recent months. This buying showed up as central bank purchases in the second quarter of 2012 were more than double the level reported a year earlier at 157.5 metric tons. If the buying continues at current levels, central banks gold purchases would total around 500 tons this year, easily surpassing last year’s 458 tons.

The bottom line for investors from the global central banks’ buying of gold? The gold standard is working its way back into the international monetary system through the back door. This should, in the long-term, put a floor under gold and help maintain it on its steady upward path.

Just last week we started to see gold bullion, silver bullion and gold miner share prices start to breakout to the upside of a 12 month consolidation pattern. This could be the start of the next major rally in precious metals as future uncertainty fears continue to rise. The large bullish technical pattern we see on the gold chart points to much higher prices over the coming 24 months. But keep in mind this is a monthly chart and it could still take months to truly breakout to new highs and start another rally.

Gold Bullion Trading

If you would like to get my weekly analysis on precious metals
and the board market join my free newsletter at www.TheGoldAndOilGuy.com

Chris Vermeulen

 

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The Precious Metals MAJOR Breakout Part II

It has been a year since the price of gold bullion topped out and even longer for silver. Many traders and investors have been patiently waiting for this long term consolidation pattern to breakout and trigger the rally for precious metals and miner stocks. Most of gold bullion is used for investment purposes.  As a result, it rises when there is economic weakness and investors lose confidence in the fiat currency of a country.

With continuing economic weakness in the United States it will almost certainly lead the Federal Reserve to act in way that is more powerful than Operation Twist which is the selling of short term securities to buy those with a longer term.   Based on the most recent data, economic growth in the United States is falling as the unemployment rate rises.  A recent statement by the Federal Reserve was unusually clear in calling for greater action in the future.

 

Gold, Silver and Dollar Weekly Price Chart:

Take a look at the weekly charts below which compare gold and silver to the US Dollar index. You will notice how major resistance for metals lines up with major support for the dollar. As this time metals are still in consolidation mode (down trend) and the dollar is in an uptrend.

Weekly Metals Outlook

 

Gold Miners ETF Weekly Chart:

Gold miners have been under pressure for a long time and while they make money they have refused to boost dividends. That being said I feel the time is coming where gold miner companies breakout and rally then start to raise dividends in shortly after to really get share prices higher.

GDX - Gold Miner Stock ETF

On August 13th I talked about the characteristic’s and how to trade the next precious metals breakout and where your money should be for the first half of the rally and where it should rotate into for the second half. Doing this could double you’re returns. Read Part I: http://www.thegoldandoilguy.com/gold-mining-stocks-continue-to-disappoint-but-not-for-long/

Overall I feel a rally is nearing in metals that will lead to major gains. It may start this week or it still could be a couple months down the road. But when it happens there should be some solid profits to be had. I continue to keep my eye on this sector for when they technically breakout and start an uptrend.

If you would like to get my weekly analysis on precious metals and the board market be sure to join my free newsletter at www.TheGoldAndOilGuy.com

Chris Vermeulen

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Monitoring Implied Volatility is Critical for Option Traders

One of the hallmarks of an options trader is the ability to reach into his trading tool bag and pull out different trading vehicles in order to accommodate the current market situation.

With few exceptions, a major component of any strategy our trader would select includes selling option premium. Premium sales usually are selected in out-of-the-money strikes where the time (extrinsic) premium constitutes 100% of the price received.

Examples of pure premium sales would include being short naked puts or calls. Another version of option premium sales would include credit spreads and iron condors wherein premium sales are combined with selling options.

It is important to remember that the time, or extrinsic premium of an option is directly related to time to expiration and implied volatility in the current 0% interest rate environment.

This current week of the options cycle is particularly difficult for two reasons. The first reason is the result of the fact that the September monthly expiration is one of four annual five week monthly options cycles. Remember that there are twelve monthly option expiration cycles, a clearly obvious fact for those possessing a calendar. What is not immediately obvious is that since there are 52 weeks in a year, four monthly cycles must contain five instead of four weeks.

Now remember from our previous discussions that the time decay of option premium is not linear. As illustrated below, time premium decay accelerates relentlessly into the closing bell at an ever accelerating pace.

Implied Volatility Option Trading

Implied Volatility Option Trading

From a practical level, the extra week of time in our five week cycle gives us an extra week of relatively sluggish decay before the accelerating decay begins to erode time premium significantly. Each week of the option cycle has particular characteristics; living in the fifth week of a five week cycle is like watching paint dry for traders depending on theta decay to benefit their positions.

The next factor that exists in our current cycle is the unusually low implied volatility that is routinely encountered across a wide variety of underlying assets. Let us look at the measure of implied volatility of the Russell 2000 index, the RVX. This measure is similar to the more frequently encountered measure of volatility for the SPX, the VIX.

As can be seen in the weekly candle chart of this volatility measure, implied volatility is at multi-year lows.

Option Trader Newsletter

Option Trader Newsletter

I consider the implied volatility to be the “stealth” component of options trading. It has impacts far greater than expected for traders and for this reason must be carefully analyzed in both a historic and current time frame for each trade considered.

In order to provide a practical example of the impact of the variable of implied volatility, let us consider how it affects a common “bread and butter” trade for most option traders. The trade is a “high probability” iron condor and consists of the combination of an out-of-the-money call credit spread and an out-of-the-money put credit spread.

The trade under discussion will be opened today and has fifty seven days to expiration. The high probability of its success derives from selecting the short options for the spread having a current delta below 10. This essentially means that these short options have a greater than 90% probability of expiring out-of-the-money. The trade therefore has a probability of being profitable in excess of 80%.

For purposes of illustration, I want to allow the magic of trade modeling to look at this trade under two different implied volatility scenarios. Displayed below is the comparison between the actual available trade today and the trade that would be possible if the volatility of the calls alone were at recent historic mean levels. I have purposely not used extreme values for the implied volatility in order to emphasize the impact of this routinely underestimated factor.

 

Implied Volatility P&L Graph

Implied Volatility P&L Graph

The curves above represent the expiration P&L graphs of the same trade taken at more normal volatility levels (the higher curve) and current volatility levels (the lower curve). The benchmark for comparison I have used is the annualized yield. The seemingly small modification of increasing implied volatility of the calls alone doubles the annualized trade yield from 80% to 160%!

I am a realist and understand that if we wish to trade, we must live in the world we are presented. The point of today’s missive is to call attention to the fact that what seem to be minor factors of trivial impact can have huge results on overall trading results.

Happy Trading!

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JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.