Sunday April 18, 2010
Last week was exciting with broad market and gold forming an intraday reversal pattern after a long overbought rally, then broke down though short term key support levels. While this move lower was tough on the pocket book for those who chased the market up the past few days and/or were not moving their protective stops up, this move is good for the health of the market.
This pullback is actually a good thing for us active traders who wait for low risk setups and don’t chase prices higher, but rather buy on the dips in a bull market when most of the risk has been flushed out already. Trading with low risk setups is not the most exciting type of trading because there are not a ton of setups but if one can be patient and wait for these plays it is a very profitable strategy in the long run.
Below are the charts showing what I am currently thinking is going to happen for gold, silver, gold stocks and oil. I will be tracking the market with intraday charts to help pin-point a low risk entry point for a possible short or long position as the market unfolds this week.
GLD – Gold Trading ETF
The chart below is an updated chart which I have showed several times. It shows how gold corrected, bottomed and is now trending back up. This week I will be watched closely to be sure we take a position which has the highest probability of working in our favor if and when a low risk setup occurs.
SLV – Silver Trading ETF
Silver really took a hit on Friday. It is now trading near support but there is not much we can do until we see what happens on Monday. There could be a bounce or more down side, tough to call right now…. And it’s not something you want to be on the wrong side of.
Gold Stocks – Gold Stock Trading
Gold stocks did not drop as much as I thought they would which indicates the market is still very bullish on gold. There is still potential for more downside… so I am letting the market unfold before doing anything.
USO – Oil Trading Fund
You can see oil moved down sharply on Friday and is now testing both a price support level and trendline support. Although this looks like a perfect setup, the market is designed to shake people out of positions before continuing the move. So it is likely for oil to dip which would break both these support levels triggering stop orders. Then the price should drop to the key support level where support should be found for at least a bounce or a new bottom.
Precious Metal & Oil ETF Trading Newsletter:
In short, the market had a nice correction on Friday and the heavy selling volume indicates that we are getting close to a larger correction which should provide two swing trades, a shorting opportunity and a new buying opportunity in the coming days, weeks or months depending how long the market takes with this pullback/correction.
Over the past month the gold and silver markets have taken a good drubbing. Silver has dropped from 19.50 to 15.00 and gold from 1227 to 1044 as the US Dollar has finally rallied after a long drawn out correction.
Since the advent of ETF’s market players have been able to invest in gold and silver for the first time without using Futures and investors have made the gold and silver ETF’s a very popular way of investing in the precious metals. The advantages of ETF’s are many versus buying a futures contract. Investors can hold them for the long haul, there is no contract switching every few months, investors can buy as much or as little as they want and there is no need to worry about a leveraged position. But are there any disadvantages to ETF’s versus a futures contract?
The chart below is the silver ETF with the symbol (SLV). Because the precious metals are a global commodity and one that has been in the spotlight lately, like most commodities they trade on a world wide scale 22-24 hours per day. Since ETF’s only trade during stock market hours there can be drastic changes to price when local markets open up the following day.
The arrows I’ve drawn show how the price of silver has been vulnerable to severe price drops on the open of trade in these stocks. The recent severe correction in silver is an excellent example of how prices can open much lower than the previous day’s close. Technicians call them price gaps when they appear on a chart pattern. Investors who are using the ETF’s to be long the metals call them EQUITY gaps because of the drop in price that occur affect their bottom line.
When investors awake to learn that gold or silver is down heavy overseas, the natural tendency for short term traders is to bail out on the open for fear of losing more money than they already have. Since these ETF’s have been closed for trading about 16 hours previously, big price changes can and do happen.
Now let’s look at a futures chart of silver. The chart below is a 1000 ounce silver futures contract.
Notice how there is only one price gap on the entire chart since the top price in January. That is because this contract trades 22 hours per day and price gaps only reflect the changes that occur from about 5 PM to 7:20 PM EST time. The remainder of the time the market is open somewhere in the world and the globex market is linked to all of them. Therefore an investor can avoid nasty drops in price over night by choosing to trade a futures contract.
Futures contracts are not for everyone as the mini contract has 1000 ounces as a minimum and most be rolled over every three months or so to a new contract. Most of the time there is a few cents difference in price as well and this is called a premium. For someone who is buying 1000 shares of the silver ETF and is an in and out short term trader might want to consider trading futures. The commissions can be much cheaper if you have the right broker charging under $3.00 commissions to trade a 1000 ounce contract which only requires a minimum margin of $1600 to trade $16,000 dollars worth of silver and the cost to fund an account is as low as $5000 dollars to open.
Probably the best advantage is that trading on these contracts begins on Sunday evening (in USA), a full 14 hours before the ETF’s open up for New York trading. On weeks such as we’ve seen this can be a marked advantage, especially when a severe correction begins to develop as the markets reopen from a weekend or Holiday.
Another advantage is the ease of which one can short these contracts. Unlike ETF’s one can short a contract just as fast and as easy as going long. It only requires a click of the button.
What about disadvantages?
Trading in futures is a leveraged game and while the gains can be magnified, so can the losses. However, if you’re already trading 1000 shares of SLV there is no difference. If you’ve never traded futures before it can be at times more emotional. Probably the biggest advantage is the ability to trade with ease and this can cause the user to overtrade and therefore accumulate more losses if you don’t have a game plan.
What about liquidity?
I’ve traded these contracts and have never ever had a problem getting in and getting out. However once in a while these contracts can fluctuate a bit more in after hours when trading is thin. I’ve seen 10-20 cent price rises after the market closes only to pullback to its original price before the markets close for those few hours a day in which there is no trading.
If you’ve been frustrated with your silver ETF when it opens down 50 cents in the morning you might want to look into trading a futures contract instead. But be sure to read up on futures and possibly try a demo trading package so as to get used to the ebb and flow and psychology of trading futures versus ETF’s. They are not for everyone, but for those who are disciplined and experienced traders; futures can offer advantages that the ETF counterparts don’t.
While we are on the subject, let’s take a look at the silver chart from a technical standpoint.
The chart below shows that silver has suffered some technical damage on the charts that should have technicians concerned.
Over the past 14 months silver has been in an uptrend defined by a parallel channel that has recently been broken on the downside and it has done so on heavy volume. As you can see by the chart, silver’s Friday lows were comparable to prices from April 2009, almost a full year ago. The correction from December has wiped out almost a year’s worth of gain in two short months. The break of the lower channel line confirms this downside momentum and has considerably weakened the technical picture.
We can see how the 16 dollar area was a key support level and when it got taken out a lot of stop loss orders were probably lying underneath that target area. Investors who had bought last spring saw all of their gains taken away in a few short months and the panic selling that ensued can be witnessed by looking at the volume spike.
Investors should not be totally surprised. The January/February period for the precious metals tend to form tops in price from which late winter corrections are born and from which spring or summer bottoms are formed. This pattern has been more often than not the modus operandi during the bull market run of the past 9 years.
We can see by the seasonal chart below that this time period is usually met with a sell-off that lasts unto month end. Readers of my past articles have been shown the following chart before in other updates.
As we have stated in the past, the month of February is not usually a good time to be in precious metals and this month’s action confirms that very well.
What about Gold ?
The chart above shows that gold recently took out a very important support area. For a few months the 1075 area in gold and the 105 area in the gold ETF (GLD) has been a key point technicians have been focused on. Last week’s rout finally took that area out. We can see that last week’s lows were below that line and that gold is trying to now climb back above it and maintain price in order to regain its support area. The important thing about a channel or support line is not whether it is penetrated by price but what price does immediately afterward. For the moment gold is trying to make its mind up as to whether it will forge forward here or breakdown to the next support area on the chart.
The next major channel line on our chart is all the way down at the 95 area on the chart. However, if we look at the September high and the October low during this rally we can make a case for support at the 100 area. For gold this would equate to the 975-980 area in spot gold. So at this current moment we remain neutral in the precious metals waiting for gold to make its decision on the next leg it is to embark on. Let’s look at the short term pattern by zooming in on the 60 minute chart of the April Gold Futures contract.
Ever since the December peak at 1227 the gold market has been in a correction that has shaved off about 180 dollars from peak to bottom. We can see that each attempted rally above the moving averages has ended up in failure. Last week, spot gold touched the 1143 area, just 10 dollars shy of the original breakout point of 1033. This return move to the point of breakout is not a rare occurrence in the commodity world and there are myriad examples of such a move before the “big” one came after the breakout. The 1044 area is also the place where India made their large purchase of gold last fall and from which the news launched the market much higher when it was announced they had purchased 200 tons of the precious metal.
Thus there are two key areas for gold to watch for. First a move back above the support shelf of 1075-1090 in gold would at least put gold back in a neutral pattern instead of a downtrend. Then if gold can above the 1100-1110 area it would provide impetus for a potential test of the highs at 1125 and 1163.
In summary, the February time frame is usually a weak time for gold and usually leads to a spring rally. The early peak in December opens up the potential for gold to attempt a March or April rally. In the meantime, one would be wise to watch the current areas of support.
1075-1090 – previous support area we need to get back above.
1010-1033 – The 200 day moving average and the original breakout point.
975-980 – The first support area of the last up leg in price that began in September.
Finally let’s look at the crude oil market.
In my past few updates I have advocated that a great play is to sell some precious metal holdings in early winter and raise some cash into the spring. Not only is this good due to the seasonal tendencies of gold to correct but it allows one to begin to deploy some of that cash into the crude oil market in late February. As you can see the oil market is usually much more seasonal in trend and that time of the year is approaching.
As you can see below, the crude oil chart shows price from March2007, 2008 and 2009. All three times oil turned out to be a great buy. The current pullback from the 83 area got as low as 71 before reversing this week and price is right at the 200 and 50 day averages. Thus the 200 day average is one place we should be on watch for as support. We are close enough now that we should be on guard for a seasonal low. Should there be a selloff as in the precious metals; the 58-60 area would offer a good chance at a seasonal bottom. If the rally has already begun the 200 day average or more importantly about 5 dollars below it would be a good support area.
We are constantly watching for low risk set-ups to get our subscribers into plays like this. Feel free to check this website for my past reports. They have advocated the same strategy as I have in this article. Why not drop by our website and see what we might have for low risk entry opportunities as we await the potential seasonal trend changes and position ourselves to take advantage of them.
Deciphering the SP500 Trend
The SP 500 and the markets topped one day after my Jan 18th forecast to our subscribers that the market had met all conditions for an interim top. This followed my Feb 25th, 2009 forecast for a huge bull market rally which we rode with aggressive stock trading. I am now forecasting an ABC correction likely lasting 3-5 months into June. We have adjusted our trading plans from individual stocks to Leveraged ETF’s to take advantage of the increase in volatility. Our ETF trading is designed to work in high volatility bull or bear cycles and has a 90% historical accuracy rate with profits typically within 24-48 hours of entry. The market moves in very clear herding behavioral patterns, and we identify those early and trade accordingly at David Banister. Here are his latest views, and you can read more at www.activetradingpartners.com/articles
If you would like to receive our Free Weekly Trading Charts and Analysis please visit our website at:
The purpose in owning commodities like gold, silver and oil is to protect oneself from the effect of inflation that I believe will begin to assert itself in the coming months.
Unfortunately, the United States has taken a monetary policy of printing massive amounts of money to attempt an escape of deflation. In just the past 16 months, the monetary base has ballooned from $908 billion to $2.0 trillion. Bailout funds in the past 2 years total $8.1 trillion….. That is 78 times more than what they spent to bail out WorldCom…… and 123 times more than they spent on Enron. U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. These are scary numbers!
The illusion of economic recovery in the U.S. is simply the function of the FED making billions and trillions of newly printed money available at literally ZERO percent interest to the largest financial institutions. The idea that you really can get something for nothing is fantasy. But that’s what’s happening – Money created out of thin air, instead of created by PRODUCTION.
A painful reality check will appear when these quantitative easing policies create inflation without employment or productivity gains. Commodities – hard assets – will outperform everything in this type of environment. To some people commodity investments may sound like a no-brainer investment, however without a sound money and risk management system in place there really is no such investment.
This is why I focus on technical analysis as it provides price points for investments when we should be putting our money to work on a weekly or monthly basis. When volatility is rising I put less money to work to protect my portfolio from sharp price movements (risk). And during low volatility I push more money into the market catching trends with lowered risks.
What really blows my mind is how almost everyone I know who employed a broker or financial advisor lost between 30-70% of their portfolios during the market crash. What the heck was everyone paying for?
What I am trying to say is everyone can make money in a bull market. The question is, do either you or your financial advisor know when to take some profits to lower overall risk? How much money will you give back when the market corrects, starts another bear market or is affected by a terrorist attack? Do you have protective stops in place?
Ok, that’s enough of that; let’s get to the charts…
Gold Futures Trading – Hour Chart
The gold futures chart allows for us to trade prices around the clock 23 hours a day. A lot of important price patterns are analyzed from the over night trading hours which helps to provide low risk and high probability setups for the GLD gold fund.
This hour chart shows about 3 times more trading data on gold than the GLD etf. Using this data we know if gold will be gapping higher or lower the next day and if the price is trading near a support or resistance level, etc… I focus on selling short gold at resistance levels in a down trend and buying dips during up trends.
The futures trading volume is very interesting to look at. The selling volume was more than twice what we are seeing for this bounce/rally. A low volume rally/bounce is not exactly what we want to see for a move higher. I have my doubts about this being THE NEXT LEG HIGHER, but let’s watch it unfold.
Gold futures Trading Signals
GLD Gold ETF Trading – Daily Chart
Trading just the US market sessions does limit the trading opportunities. When commodity etf’s open each day they tend to gap up or down as the overnight trading move the price. To most traders GLD is an ugly looking chart because of its tendency to gap up and down each day. But when you focus on the gold futures charts for trend and price pattern analysis things become very clear.
Gold is moving higher currently and I am waiting for a low risk entry point before jumping on board. I don’t chase prices higher unless there is a lot of excitement in the air with lots of momentum to back up the higher risk play and, I do not feel this is a time to panic and buy gold.
GLD Gold ETF Trading
SLV Silver Exchange Trade Fund – Daily Chart
Silver has had a nice pop and I thing it will out perform gold when the time comes. But this upward slanted mega phone pattern is not what I like to trade. While it is still bullish, it’s close to a neutral pattern and breakdowns from this can be fast and painful if you do not have a protective stop in place.
It’s looking a little long in the teeth for this bounce so I am waiting to see what happens over the next few days.
Silver SLV ETF
Crude Oil USO Fund – Daily Chart
Oil has had a great bounce off of a major support level back in December. Oil is now testing its October highs. It will take a few weeks for a new setup to form in oil as buying here carries about 15% downside risk.
Oil Trading Signals
Natural Gas UNG Fund – Daily Chart
Last weekend I got together with my buddy who is a futures broker in Toronto. We spent a bunch of time going over some charts, swapping thoughts, ideas strategies etc…
Anyways he said a ton of people are opening futures accounts and wanting to trade natural gas. He said that is a suicidal thing to do and that almost everyone who opens an account to trade natural gas loses all their money within 3 months. Natural gas is one commodity you need to have a solid trading strategy along with strict risk and money management.
Natural gas on the UNG chart looks like a possible short play. But let’s wait and see how things unfold this week.
Natural Gas Trading
Gold, Silver, Oil & Nat Gas Trading Conclusion:
Trading and investing with technical analysis allows us to assess the current market volatility and trends. Understanding these things will help protect your hard earned money.
It looks like 2010 will be a fantastic year for trading!
Get my Trading Reports, Analysis and My Trades:www.TheGoldAndOilGuy.com
Chris Vermeulen
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Overall this week has not been that exciting. Volume is below average as the big money traders slowly get back into action and wait for Fridays economic data to come out.
We have seen gold, silver and oil put in a nice rally this week but they are still not in the clear. If we get flat or better unemployment numbers we should see the US dollar rally. This seems to be exactly what the chart is telling us when using technical analysis. Here are the numbers for Friday.
Friday unemployment numbers come out for both the US & Canada.
7:00 AM ET – Canadian Unemployment Rate, Forecast 8.5%, Previous 8.5%
8:30 AM ET – USD Nonfarm Payrolls, Forecast 0%, Previous -11K
8:30 AM ET – USD Unemployment Rate, Forecast 10.1%, Previous 10%
US Dollar Daily Trend
The current trend of the dollar is now up when looking at the daily chart (higher highs and lows). The strong price thrust in December has formed a nice flag pattern. This is a continuation pattern meaning the dollar should continue higher once this pause is complete.
US Dollar Trend
Gold Futures Trading Trend – 60 Minute Candle Chart
As you can see from the chart below gold has made a short term bottom and is trading at a major resistance level. The question is, does gold reverse and head sharply lower or does it break through the resistance level?
Could this be the start of a new leg higher or a C wave lower (ABC retrace)?
I hope it is an ABC retrace which is a bullish price pattern and it flushes out the weak positions before heading higher.
These are questions no one knows for sure but understanding where the current price is trading and that volatility could pick up very quickly in the next couple days is crucial. When volatility is about to increase managing your open positions or adjusting any possible new trades is an important part of being a successful trader.
Rule #1 Keep overall risk per trade low
If volatility is about to increase I usually trade smaller positions unless I am in the zone and feeling the markets each and every move.
Rule #2 Never let a winning trade turn into a loser
I scale out of positions a little quicker during volatile times to lock in a small profit (20-30% of position) which minimizes my overall risk. This also alleviates some stress as you now have a small profit and you feel good mentally.
Gold Futures Trend Trading
Crude Oil – Daily Trend Trading Chart
Many of us have had a great run with oil. Some of us traded the USO fund which is equivalent to buying oil at $71. Volatility was high during the time of the trade so we scaled out of the position at $75, $77.50 and $80. Some of you still have a small core position still in place which is fantastic to see!
Currently oil looks long in the teeth and ready for a pullback which could end up working perfect with Friday’s Economic news. Only time will tell so lets take it one candle at a time.
Trend Of Crude Oil
Commodity Trend Trading Conclusion:
In short, this is the first week of the year with light volume as traders get back in the groove and wait for 2010’s first big economic news to hit the wires. No many of us want to stick their necks out just yet.
I don’t know what will happen but my thoughts are the news will be positive, even if its not. Some very well educated individuals think the unemployment numbers are false giving everyone the impression things are getting better. I don’t really know what to think, but I did just see Mr. Moores most recent file on Tuesday and I think it is very possible the US is pulling a long con on Americans. All I can say is thank god I’m Canadian Eh! lol
Anyways if the numbers are positive we will see money move into the US dollar, gold and oil will reverse back down. Stocks I think are decoupling from the inverse relationship with the dollar and if that is the case stocks should do well.
Trading before big news can be deadly so I continue wait until Friday or next week before doing much.
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