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Are Commodities and the Dow Index Dead?

It was a heart pounding week on Wall Street as traders and investors locked in profits during 2010’s first round of earnings season. While it is normal to see selling of shares after good news hits the market, last weeks melt down was over exaggerated and for good reasons.

In short, we expected good earnings and that is why the markets have been crawling higher the past couple months (buy on rumor, sell on news). But what made last weeks sell off so strong was the fact the market was way overbought on the short term time frame and looking ready for a correction already. So we saw twice the selling pressure crammed into one week.

Looking back at a 12 year chart of the Dow Jones Industrial Average we can see the market is now trading at a major resistance level. There are two scenarios the market will likely follow in the coming 12 months. And it could take a year for each of these scenarios to unfold.

Scenario #1 – The market could top then start heading lower to test the 2009 March low. I don’t want this but it could still happen. Topping is a process. Unlike most bottoms which happen very quickly, tops tend to drag out much longer. In this case I figure we are looking at 4-12 month time frame for the market to truly roll over and confirm that we are in a major bear market again.

Scenario #2 – If the market holds up relatively well and forms a bull flag then we can expect to see higher prices in the future. If this happens it will take 4-12 months to unfold also.

Both scenarios have characteristics associated with them, so as the market progresses I will update on the market internals which will help tell us if the underlying market is holding up well or deteriorating. Only time will tell and we will play it one candle at a time.

Dow Jones Industrial Average – What Is Next?

Gold Stocks – Rockets or Rocks?

The gold stock index closed below its support trend line which held up for over a year. This is not a good sign for gold or gold stocks but there is light at the end of the tunnel.

Simple technical analysis is telling us to be cautious at these price levels. If we zoom way out on the charts the current price level and chart patterns on these charts scare me. The gold stock/Gold ratio chart is trading under resistance and the HUI (gold stock index) is trading near the 2008 high. What I do not like is the technical breakdown on the HUI monthly chart. You can see the trend line break on the chart with my small zoomed in picture.

The good news is that everything looks to be extremely over sold on the 60 minute charts so I am expecting a bounce across the entire market for a 1-5 day dead cat bounce. Friday we did see gold stocks move up strong off their lows out performing the price of gold. This is positive for gold and stocks. Depending on how that unfolds we could take a short term momentum play to profit from a possible leg lower.

Precious Metals ETF Daily Charts – Gold & Silver

Gold and silver lost some shine last week as they plunged towards their next support level. A bounce is expected but then I feel we are heading lower and this will likely shake out the majority of traders before starting another rally higher.

On Jan 13th I posted a report indicating gold and silver were headed lower because of the recent price action as silver and gold both had a Pop & Drop chart pattern with heavy selling volume on the 60 minute chart:

Energy Fund Trading – USO & UNG

I am really starting to like USO for an oversold bounce off support. I would like to see the market reaction on Monday before we do anything. With everything closing near their lows on Friday, panic selling from fear may creep into the minds of traders and investors.

Natural Gas fund looks to be setting up a bull flag. It will be interesting to watch this progress.

Commodity and Stock Market Index Trading Conclusion:

This month looks and feels like last Jan – March, but reversed. The market is now getting choppy as the bulls and bears fight for direction making is difficult to swing trade. Times like these are best for intraday traders, not swing traders. Trading tops is actually much more difficult than trading a bottoming market in my opinion so I will be picky with trade setups. My number one goal is to preserve capital and avoid choppy market conditions as part of managing risk.

Final trading thoughts, I look for the broad market to get a possible bounce this week, but I feel lower prices are still to come. The USO oil fund looks prime for the picking and that could be our next trade.

If you would like to receive my Free ETF Trading Newsletter visit my website:

Chris Vermeulen
ETF Trading Gold Newsletter

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How to Trade Gold and other Commodity ETF’s

Jan 18th, 2010

Whether you are trading stocks, ETFs or futures, technical analysis is the preferred choice for short term traders. Technical analysis in short is the study of price and volume movements on charts. It can be used for studying charts in any time frame whether you are a 1 minute chartist or a long term investor using monthly charts.

Using technical analysis in my opinion really opens the door for a trader to lower his/her overall risk when investing money. I always like to know if the investments I am watching are trading near a critical price level (support or resistance). During these times you can take positions that have very clear entry and exit points for trading. Also it puts the odds in your favor when a position is entered in the same direction of the underlying trend.

Price action is how we make money in the market, so I strictly follow price and volume when trading as they are the least lagging indicator on what the market it doing.

I have put together a few charts using commodity ETFs to show you what I am seeing in the market and what we should expect to see in the coming days.

GLD ETF Trader – Daily Trend Chart

The gold trading chart below shows two different types of trends. The initial timeframe of the chart illustrates what I call a Normal Trend. This is a series of higher highs and lows.

This type of trend allows an investment to continue profitably for a very long period of time. For example a daily chart like the one below can continue to trend like this for 6-8 months. The reason for this is because price appreciation is increasing at a rate which investors are comfortable with. Also, the pullbacks cleanse the investment vehicle of weak traders every few weeks allowing fresh money to enter at higher price.

Now if you look at the later timeframe of this rally we observe a rally phase I call an Extended Rally. An extended rally is when price appreciates without any pullbacks.

You can make a fortune with this trend very quickly, but you must realize that reversals are fast and sharp. And that, we observe, is how GLD performed in December. While some call December’s price drop a pullback, I call it a technical breakdown. The sharp price reversal and heavy volume associated with this type of move generally provides excellent short term momentum trades. A lot of damage is done to the investment on a heavy volume breakdown taking weeks for a recovering to occur.

Normal trend rally, extended rally, predictably fast and sharp technical breakdown followed by weeks of recovery.

DIA Exchange Traded Fund – Daily Trend Trading

The DIA exchange traded fund shows a very similar chart as gold above. First we have a nice Normal Trend that then evolved into an Extended Trend. The trend for the DIA index fund is not nearly as steep at the gold chart, so it could trend a little longer. But once the price breaks down, everyone is going to be selling out to lock in gains and cut losses before new positions are entered.

I have several tools and stats I use for helping me in timing turning points. Some are great short term indicators only predicting 1-2 days out like following small cap stocks, or gold stocks in relation to the broad index, and others are long term things like cycles, volume analysis, market internals and the volatility index.

My point here is to keep everyone alert and ready to take profits if we see things start to roll over. Friday there was BIG selling volume across the board – so don’t blink now.
Trading DIA ETF

Silver & Gold ETF Trading – Daily Charts

Below is the chart of the silver ETF SLV and I overlaid the GLD gold fund in green so you can see how they move in sync. The blue boxes on the chart show the pattern that I think is forming and what to expect in the coming days.

From looking at gold in both other currencies and with respect to gold stocks which have been underperforming, I feel we are going to see lower prices still. At the moment I am neutral on silver and gold for the short term time frame (daily & 60 minute charts).
Exchange Traded Fund for Silver

USO Crude Oil Fund – Daily Trend Chart

Oil has slid lower the past 5 sessions and is now nearing a support level. This has me looking for an oversold bounce with the potential to rally much higher. I am keeping an eye on this for any possible low risk setup.
USO Oil fund Trader

UNG Natural Gas Fund – Daily Trading Chart

While UNG is not a great intermediate and long term fund to invest in, I do find it trades very nicely for intraday and short swing trades. I am neutral on natural gas for the time being. It could go either way from here and I’m not willing to take on a 50/50 probability trade. Let’s wait for something exciting to form.
Natural Gas UNG Trader

Commodity Trading Conclusion:
In short, gold and silver have been underperforming the market recently which is not what we want to see. They have led the market higher all year but are now taking a breather.

The way I see gold, silver, oil and natural gas is that they are trading below their recent highs and still have more room to fall before landing on a solid support level.

The stock market is now over extended and looks ready for a sharp correction. If this happens we will see commodities drop and test lower prices also.

There is not much we can do right now other than protect our current long positions by tightening our stops. Depending on the strength of the breakdown, there could be a great opportunity for short term traders (60 minute chart traders) to make some quick money. I expect a sell off which will last 3-5 days at the least.

If you would like to receive my Free Technical Trading Newsletter for ETFS  and Futures please visit my website:

Chris Vermeulen

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Year End Commodity & ETF Trend Trading Signals

Well, here we are with only hours left before the year is over. Virtually every investment is up other than the US dollar.

Not much has changed since my last gold market trends report. But I have provided some interesting charts that show us what is possible in the coming weeks for the dollar, gold and natural gas.

US Dollar Trend Analysis – Resistance Levels
The dollar has shown some strength in the past month. It was a no brainer trade for 2009. You were either long gold or short the dollar. The chart below shows the key resistance levels for the $USD. I have a feeling we are going to see the dollar test the 80 -81 levels before rolling over and heading south again.

If this happens then gold and silver will continue to pull back. I am actually hoping the dollar moves higher and gold drops back to test the $1000-1060 level. This would clear the way for gold and the dollar to continue with their longer term trends with increased momentum (dollar collapses, gold goes parabolic).
Dollar Trend

GLD Gold ETF – Daily Chart
The daily gold swing trading chart is really starting to look attractive for a buy signal. Depending on what the US dollar does in the coming days will set the tone for gold.

We could see gold start to rally starting tomorrow or it will become volatile and start to sell off sharply in the coming days. Right now we have very light volume so any moves/breakouts cannot be taken seriously or with a large position.

If the dollar starts to rally we could see the GLD ETF drop to the $97.50 – $103 level.
Gold Trend Trading

Spot Gold Trend Analysis – 18 Day, 1hr Bar Chart
Starting in 2010 I will be providing futures trading analysis and signals so I thought I would provide a chart of the spot gold trend I have been day trading over the holidays.

This may seem like I am going against my #1 trading Rule – Never Trade Against the Trend, but the trend changes depending on time frame and trading style you are using. In short, gold reversed very strong 18 days ago just as we anticipated it would. The selling momentum was so strong it made for excellent gold futures day trading setups which I took advantage of over the past 10 trading days.

The chart below is of the 100 ounce gold GC Feb 10 futures contract which I traded. The chart is shrunk down and does not show my setups, nor does the chart look very sexy, but it clearly shows the direction of the trend and the BIG SELLING VOLUME.

The table shows my recent trades and if you take a close look all of the trades I did were Short Trades. Because the momentum and trend is down on this time frame I only traded perfect short setups (profiting from gold as it loses value).
Gold Futures Trading

UNG Natural Gas Trading Fund
UNG appears to be trading at resistance and starting to look like its rolling over. It did move above last weeks high which voids the reversal candle we had Tuesday and Thursday, or else it would have been a short setup for us. I don’t chase a trade, that’s my #2 rule, so I am waiting for a possible bounce here, test of resistance then another reversal back down.
Natural Gas Trends

Commodity & ETF Year End Trends:
In short, we continue the waiting game for more setups in the coming weeks as volatility and volume creep back into the market. The dollar and gold are currently trading at pivot points and no one knows which way to play them.

Trading futures run virtually 24 hours a day and have provided some excellent trading opportunities that I will be providing in the coming weeks for traders.

Natural Gas is trading at pivot point and looking ready for another move down.

Crude oil and the board market I feel will top out in the next 2-5 days but nothing worth putting any money on at this time.

I would like to thank everyone for their kind words and support over the past 12 months. I wish you all a happy and safe New Years!

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Chris Vermeulen – Gold Trend Analysis & Signals

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Holiday Gold, Oil and Index Trend Trading

Dec 27th 2009
Another holiday trading extravaganza!!!

Last week the market fell into its regular holiday tradition of light volume, as institutions and big traders enjoyed the holidays thus allowing prices to drift higher. We still have one more week of light trading volume before this year and holiday season is officially over.

Trading during low volume times is regularly misinterpreted. Many traders figure they should not be trading this time of the year but from my experience, the last two weeks of the year are amazing for short term swing plays or day trading. The market seems to be much more predictable when the large program traders are not involved.

Also the more speculative plays (small and mid cap stocks) always seem to out perform as buyers bid the prices higher into the light selling volume. This is most likely why we are seeing the NASDAQ and Russell 2000 indexes making some nice gains of late.

Take a look at the charts…

Broad Market & NASDAQ Low Volume Rally

Stock Market Trend

Stock Market Trend

GLD ETF Trading – Daily Chart
Gold prices broke down as expected in early December and are now nearing a possible bottom. The past 3 weeks have provided some very exciting day trades shorting spot gold prices. In the next few weeks I will be starting to provide more spot gold charts and intraday price action for all the international traders and futures traders ?

I did not provide the chart of silver as it trades very similar to gold. When the time comes I will provide detailed analysis for entry and exit points for members.

Gold Market Trend

Gold Market Trend

Crude Oil USO Trend Trading
USO fund had a very nice pullback in early December and I pointed out a spec play at $35.50 with targets set at $37, $38 and $40. So far the first two profit taking targets have been reached.

Sorry for all the lines on the chart but sometimes it’s the only way to remember where all the crucial levels are for trading pivot points.

Oil Trend Trading

Oil Trend Trading

Natural Gas UNG Trend Trading
Natural gas trades like a bucking bronco. It’s a tough ride if you do not understand market psychology and apply strict money management to your positions.

Last weeks price action closed with a bearish candle after testing resistance twice. We could get a short trade this week depending on what happens from here. Let’s keep our eyes open for a low risk setup.

Natural Gas Trend

Natural Gas Trend

Market Trends Trading Conclusion:

This year has been fantastic for making money, but next year will most likely be much more difficult if we see the market top and head south or trend sideways. The market topping is not an event; rather a process and trend following systems will start having more losing trades than winners as the market momentum shifts from up, to sideways then down.

Don’t get me wrong, I am not saying I think its going to roll over and head south, cause quite frankly no one knows what its going to do from this point forward. This is the reason we are in cash and patiently awaiting new low risk opportunities to place our money. The joy of trading with technical analysis is that you don’t care which direction the markets go because the analysis, if done correctly, allows you to profit in all market conditions using different trading strategies.

The board market
, in my opinion, is way overbought due to the holiday rally. But we must remember there is another low volume week as we approach New Years and this could extend the rally more. Smaller trading positions should be used until we enter the New Year and volume steps back into the market.

Gold and silver are in a short term down trend and trading near a resistance level. We could see prices drop quickly or rally from here. So we are letting things unfold before making a commitment.

continues to move higher and last weeks weakening US dollar helped give oil a boost.

Natural gas is trading at resistance and looks ready to head back down. The daily and 30 minute chart did not setup a signal to short Natural Gas, but it was very close.

As usual, I will update on the market and provide daily updates and trades to members.

Free Gold ETF Trading Newsletter

Chris Vermeulen – Gold Newsletter

Gold Trends: The Mirage of Wealth

Dec 26th, 2009 – Gold Trends
How did your Dad pay his college tuition with a part-time summer job? Why does it take two breadwinners to support a family these days? What with all the recent fuss about gold?

The answer to these seemingly unrelated questions have a common answer.
Cause and Effect

Governments have a curious tendency to run deficits; and when they do, they have two options.

1) Decrease disbursements
This usually takes the form of spending cuts. Public servants are laid off, social programs lose funding and government bureaucracies are consolidated. Politicians typically consider spending cuts a last resort and have a dubious record of fiscal discipline in this regard.

2) Increase receipts
This usually takes the form of tax hikes and loans from foreign creditors. Politicians frown upon this option as well, especially during an election year.
There is also third, sneakier option that you may not hear about on the campaign trail or in state-of-the-union address.

3) Monetize the difference
This simply means governments fire up the printing press and create enough cash to cover the budget deficit. No cuts, no taxes. Needless to say, politicians love this option and have abused it for decades.
So what is the effect of money creation?

“By a continuing process of inflation, governments can confiscate secretly and unobserved an important part of the wealth of their citizens.” -John Maynard Keynes

There are three things guaranteed in nations with fiat currencies: death, taxes, and inflation. Inflation is, by definition, expansion of the money supply. As the newly printed money circulates in the economy, the value of the old money is diluted. In other words, as freshly created dollars – conjured up by elected officials to balance the budget- filters into the money supply, it steals value from pre-existing dollars. That means every dollar printed by the government appropriates purchasing power from every dollar in existence. From cash in your wallet to money in your bank account and dollars held by foreign creditors, all money in the system is indiscriminately deprived of value.

Think of inflation as a hidden tax or a trade-off. When governments create money to engage in aggressive foreign policy, enact socialized health care and slash taxes, citizens pay in the form of inflation. Most of us, however, are oblivious to the root cause of inflation and tend to ignore its devastating effects.

The by-product of all this excess money in circulation is higher prices. As money loses purchasing power it takes more cash to buy things. Food, rent, gas, tuition, movie tickets and anything else denominated in dollars becomes more expensive. Even wages and salaries increase, but not at the rate of consumer goods. As a result, a larger portion of our income is allocated towards basic expenses like groceries and mortgage payments and less money is available for discretionary spending. Inflation gives us the illusion of wealth. Our stocks, houses and wages may be appreciating from a nominal standpoint, but relatively speaking, we are become poorer.

Gold Trends

Gold Trends

This explains why even though we are being paid more, our standard of living is plummeting. Mom and Dad have to work full time to make ends meet. Summer earnings become insufficient to cover tuition and students are forced to take out massive student loans. The benefactors are the politicians who get their hands on the hot-off-the-press cash while it still has full value. By the time the new money gains velocity and consumer prices rise sharply they are long out of office collecting their pension checks.

This vicious cycle has perpetuated itself for decades and is reaching a tipping point in many countries. The United States in particular has raised the stakes with bailouts, stimulus packages and promises to insure virtually every American mortgage and bank account. Of course, tax hikes and spending cuts are not funding these bold initiatives; the monopoly-money maker at the Fed is.

Unless the fundamental laws of economics are magically repelled, inflationary pressures will ultimately engulf deflationary ones. Unfortunately, no nation is immune from the cause and effect nature of economics. Governments who venture away from the principals of sound money and create grotesque amounts of unbacked cash are locking their currency into a long-term downward trajectory.

Hyper inflation has many precedents in modern society and has crippled a myriad of robust economies.

Gold Holds Value

Gold Holds Value

Gold is a dynamic metal. Aside from being industrially useful, gold has a variety of attributes that naturally lend itself as a medium of exchange. Gold is easily divisible, fungible, has a superb value to weight ratio and never decays or rusts. It is rare, difficult to mine, nearly impossible to counterfeit, and has a magnificent track record of holding its value.

In fact, according to Jeff Clark at Casey Research, in 1935, when an ounce of gold was worth $35, you could buy:
• a top-quality tailored suit for $19.75 – or 0.56 ounces of gold
• a family car for $500 – or 14.3 ounces of gold
• a house for $7,150 – or 204.2 ounces of gold

Today, with an ounce of gold worth north of $1000 an ounce:
• that same top-quality, tailored suit costs $600 – or 0.56 ounces of gold
• the family car now costs $15,000 – or 14.2 ounces of gold
• the house averages $181,100* – or 204.6 ounces of gold*
• *average house price from 2008 / gold at 2008 price of $880/ounce

If your grandfather locked $7,000 USD – the approximate value of an early 20th century home- in a vault when he was young, the state-run printing press would relentlessly dilute the purchasing power of his saved money. 75 years later, you would be hard-pressed to find a decent used car for the same amount. Conversely, if he instead purchased 200 one-ounce gold coins with his $7000 in cash and locked it in the same vault, his hard earned wealth would be remarkably preserved. With proceeds from your grandfathers gold coins you could buy an average American house, just like he could have back in 1935.

Today, gold’s inverse relationship with the USD continues. As money creation continues to destroy the value of USD’s, gold casually mirrors the decline. In essence, the fuss about gold is really just a reaction to drastic government spending programs.

Implications, Considerations and Recommendations

The prospects of gold look increasingly bullish.

• Gold as a hedge against inflation is becoming more mainstream. It is only a matter of time before inflation rears its ugly head.
• Central banks are expected to be net buyers of gold in 2010 for the first time in decades.
• Gold production is in a state of perpetual decline. Old mines are closing at alarming rate while capital for new mines has dried up. New deposits are being reported less frequently and at lower grades.
• China is allowing and even encouraging its citizens to buy physical gold.
• Ben Bernake occasionally refers to his mystical exit strategy yet refuses to budge interest rates. All sign point to more stimulus, more bailouts and more government spending.

This all adds up to gold turning the corner in 2010 and cementing its bull-market status.

In the context of recent events, any day trader will tell you that unprecedented interventionism by world leaders has spelled unprecedented volatility in stocks and commodities. From a macro-economic standpoint, we expect this trend to continue for the foreseeable future. Technical analysis and experienced advice is vital to playing today’s gold market profitably. Opportunities are everywhere.

As gold continues to march higher at the expense of the USD, there are many ways to profit. Purchasing physical gold bullion, gold ETFs and gold funds are a great way to insure your wealth against over-zealous elected officials. For even better returns, consider leveraged plays like gold producers and explorers. Regardless of the platform, it is highly recommended that you have a portion of your portfolio exposed to gold in these uncertain times. And if you want to pleasantly surprise your future grand kids, please, don’t bury stacks on 20’s in a time capsule.

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Trevor Koverko
Contributing Analyst