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The Dollar & Gold – What’s Next?

Feb 21 2010
Last week was strong with stocks and commodities moving up sharply. As nice as it was to see a rally, I still have my doubts whether this move has legs behind it. As prices moved higher throughout the week we saw volume become thinner and thinner.

Basic technical analysis of the recent price action, when looking at the hourly charts is pointing to a sharp pullback. The indexes, gold and silver have both rallied (drifted) higher on declining volume as they near resistance.

Let’s take a quick look at the US Dollar and Gold Charts
The US Dollar has been in a strong rally since the last week of December. The once easy money trade (short the Dollar) has been over for a couple of months but it may be another good trade if gold is rejected here at the 50% retracement level.

The next month or so will be interesting to see whether the dollar will continue to rally or drop like a rock as traders sell Dollars for another easy short trade. There is not much we can do here other than wait for a setup on the daily and hourly charts to form.

US Dollar – Weekly Chart


GLD – Gold Daily Chart
Gold still looks very bullish. Actually, the more gold pulls back the more I like the chart. This daily chart shows a very nice bull flag. The price is currently testing the upper trend channel line and this is what makes me think we are going to see a pop in gold prices or a sharp drop.

I would like to see gold pullback one more time and make a new multi-week low before heading higher. We did see extreme fear in the market 2 weeks ago which is when we took some long positions, but the lighter volume rally is not giving me comfort in adding more positions at this time.

Weekend Trading Conclusion:
In short, we nailed the market bottom on February 5th taking some long positions in US and Canadian ETF’s. I tightened our protective stops for these positions a couple days later making sure to protect our hard earned money. The Canadian trades have performed extremely well for us.

Now we just wait for another low risk entry point which could happen this week depending on what the market does.

If you would like to receive my free weekly gold newsletter, please visit my website:

Chris Vermeulen
www.GoldAndOilGuy.com

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The Weak-end Trading Report

Jan 22, 2010
It’s been a crazy week for stock and futures traders as the market moved up and down like a yo-yo, finally closing down sharply on the week.

Earlier this week I posted a report showing the Volatility Index (VIX) and how it was then trading at an extreme low level which triggered the sharp market corrections. Since that post the VIX has now risen over 30% as traders start selling positions to lock in gains.

Take a quick look at the Volatility Index chart:


Chart of S&P500 Daily Price Action
Since the low in the volatility index a few days ago we have seen the S&P500 drop over 3.4%. This sharp sell off in equities and ES futures has happened in a very short period of time making the overall market oversold when looking at short time frame of the daily chart. With the market oversold and also trading near a support level I expect we could get a weak bounce lasting 1-5 days before rolling over for another wave of selling.

There are several reasons I feel this will happen:
1. Experience from seeing setups/patterns like this across many different indexes and investment vehicles leads me to believe distribution of shares are now starting to flood the market.

2. The market sentiment surveys are still extremely bullish. What does this mean? Well if almost everyone is bullish, then who is left to buy?

3. As the good old saying goes “Buy the Rumor, Sell the News”. With earning season starting I cannot help but think everyone (smart money) will be selling into the good earnings news as dumb money buys into stocks as they meet or beat earnings. This inflow of dumb money is exactly what the big guys need to unload massive amounts of shares at a premium. Also I would like to point out that earning estimates have been very low that past year which I think has been on purpose for the institutions. This makes it very easy for companies to beat estimates each quarter giving the warm cozy feeling to retail investors (us, the small guys)

4. Also Chares Biderman on Bloomberg pointed out the other day that the market looks to be manipulated by the feds as virtually all the gains have been produced after hours in the futures market.

Chares Biderman Video
The United States in my opinion is much more corrupt than most people think and I don’t really want to get into this rather large and interesting debate at the moment. But Charles Biderman has some very interesting points which fall in line with my thinking about how much of what is happening is really natural and what is completely manipulated in the past 10 months of rising market prices.

Must Watch 5 Minute Video

Quick Technical Chart Update on Gold
I thought this chart may be of interest to some of you as it shows two perfect textbook plays on the 4hr gold futures trading chart.

As you can see the first pattern is a reverse head & shoulders pattern. This is bullish and a breakout above the neckline would signal a buy point. Now if we use basic technical analysis with this pattern we can measure the potential move up by looking reverse head and shoulders pattern. You take the low of the upside down head $1075, and go straight up to the neckline at $1117. That is a total of $42. So if we add that $42 to the breakout point above the neckline then we can have a price target of $1117 + $42 = $1159.

As we can see the price of gold over the next couple days rallied to the $1160 level. Trading is not that easy but that is how it works in general. The hard part is knowing how to manage your trade and I scale out of positions as the price matures reaching short term resistance levels and by adjusting my stops accordingly to lock in maximum gains while minimizing downside risk.

A couple days later the same chart formed a regular Head & Shoulders and has since moved its potential measured move. I m not expecting a weak bounce in gold as with the overall stock market, but I am still not sure that the selling is over.
4 Hour Gold Trend

The “Weak’end Trading Conclusion:
In short, the market was turned upside down this week. Those who follow me should be in cash or mostly in cash as this drop was anticipated a few days ago.

Trading during fast moving markets is much tougher for swing traders as pivot points for indexes and commodities tend to happen during the intraday or during futures trading at night. High volatility like this is fantastic for active traders who focus on shorter time frames like the 4hr and 60minute charts, as opposed to trading just the daily chart and entering and exiting positions at the open and close each day.

I continue to watch the market and plan on providing some of these short term setups on the 4 hr chart using both the GLD etf gold fund and the YG Gold futures mini contract.

If you are interested in Trading Gold Futures and other contracts please join my Free Futures Trading Newsletter:

Chris Vermeulen

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Nonfarm Payrolls This Friday Could Dampen Commodities

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%

Here is a table I created for understanding what economic data moves stocks, bonds, US$ and gold: http://www.thegoldandoilguy.com/Economic-Indicators.pdf

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

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

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

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.

If you would like these trading reports delivered to your inbox:

Chris Vermeulen
www.TheTechnicalTraders.com