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Learning How Theta Can Be Utilized to Trade Gold

In the previous article, “Learning How to Profit from Theta When Trading SPX Options,” I discussed the basics of the famed option Greek, Theta. A fundamental knowledge of Theta is imperative in order to understand the mechanics and construction of option strategies. In many cases, Theta is either the profit engine or the means by which experienced option traders reduce the cost of opening a new position. Theta can even take an ETF that pays no dividend and create a monthly income stream utilizing a technique known as a covered call write.

The most exciting thing about options is their versatility. You can trade them in so many different ways. A trader can define a positions’ risk with unbelievable precision. When traded properly utilizing hard stops, options offer traders opportunities that stocks and futures simply cannot provide. Theta allows option traders to write spreads which generally offer nice returns with very limited risk.

Theta is the fundamental reason behind the slow and relentless deterioration of option values over time. As a series of options gets closer to expiration, Theta becomes a very powerful force. As stated in the previous article, the final two weeks of option expiration put Theta into overdrive. Courtesy of Optionsuniversity, the two charts listed below illustrate the rapid decay of Theta.

These charts illustrate effectively that option contracts which are out of the money and consist entirely of time premium decline rapidly in value on their way to 0 potentially. While Theta must be respected, it is Theta’s relationship with implied volatility that really makes it a force that must be monitored closely.

While I will not discuss implied volatility in this article, in future articles it will gain considerable attention. Implied volatility is paramount in every decision that an option trader makes. Ignoring implied volatility and Theta is a recipe for disaster, the kind of disaster where an entire trading account is wiped out in less than 30 days. In most of the trades that I place, Theta is regularly a profit engine. I never purchase options naked, in every option trade that I construct I am utilizing some form of a spread in order to mitigate the ever present wasting away of time premium. In many cases, Theta is the driving force behind my profitability.

In any other case, Theta decreases the cost for me to purchase options allowing me to minimize my risk to an acceptable level. Vertical spreads come in two variations: debit spreads and credit spreads. A vertical spread is a multi-legged option trade which involves more than one strike price. As an example, we will assume that GLD is trading around $119/share. If I were to have placed a call credit spread trade at the close on Thursday I could have sold the GLD August 120 call strike and purchased the GLD August 121 call strike, thus receiving a credit in my account.

At current prices as I type, the August 120 call strike would have resulted in a credit to my trading account of $53 dollars while the August 121 call strike would have resulted in a debit in my account of $29 dollars with a one lot position size. If I were to place this trade, I would have a strong feeling that the price of GLD was going to decline. The reason this trade is called a vertical credit spread is because the total trade results in a credit to my account of $24 dollars less commissions. The vertical aspect of the trade is based on the arrangement of the positions on the options board, also called an option chain.

When an option trader places a credit spread, they are relying on time decay, Theta, to provide them with profits. In many cases, option traders will utilize vertical spreads to play a directional bias. In the example above, the bias on GLD would be to the downside. However, the maximum amount I can lose is limited because I purchased the 121 call. The most I can lose is $100 dollars minus the credit of $24 dollars. Thus, the worst case scenario for this call credit spread would be a loss of $76 dollars for every contract I had put on. If I had put on 5 contracts, my loss would have been limited to $380 dollars plus commissions.

A call debit spread is constructed exactly the opposite direction. If I believed that gold was going to increase in value I could buy 1 August 120 GLD call for $53 dollars and sell 1 August GLD 121 call for $29 dollars. Notice that the sale of the GLD 121 call reduces the cost of the GLD 120 call. By selling the GLD 121 call, I reduce the cost of this spread down to $26 dollars. However, my maximum gain is limited to $74 dollars minus commissions. The point of this illustration is more to focus on the way Theta helps option traders in practical situations.

When an option trader utilizes a credit spread, Theta operates as the profit engine. When an option trader does the exact opposite by placing a debit spread, Theta acts to reduce the overall cost of the spread reducing the overall risk exposure. As one can see, understanding Theta is crucial when trading options. While vertical spreads are very basic, they can provide nice returns while having the unique ability to control risk with an extremely tight leash.

In future articles, we will dissect the various option trading strategies which option traders can utilize in different situations, at different points within the option expiration cycle. While this article will conclude the basic overview of Theta, future articles will discuss intimately the key relationship that Theta and implied volatility share. In closing, I will leave you with the famous muse of Benjamin Franklin, “Time is money.”

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Chris Vermeulen – Gold Analyst/Trader
J.W Jones – Independent Options Trader

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How to Take Advantage of Panic Selling for SP500 and Gold

Did you close out any long positions today? Well if not then you are one of a few!

Today (Wednesday) the market gapped down 1.5% at the opening bell which set a very negative tone for the session. Volume was screaming as protective stops triggered and traders close out positions before prices fell much further. This gap seemed to have caught several traders off guard but those of you who follow my newsletter knew something big was brewing and to keep positions very small.

Just before the close on Tuesday I had a buy signal for the SP500 which was generated from the extreme readings on the market internals. After watching the market chop around and get squeezed into the apex of the rising wedge the past 3 weeks I knew something big was about to happen and I did not want to get everyone involved because I felt a large gap was about to happen and the odds were 50/50. Instead we passed on the technical buy signal and waited to see what would happen Wednesday.

Below are a few charts showing one of my extreme reading indicators I use which helps me to identify possible short term bottoms.

SP500 – SPY Exchange Traded Fund

This daily chart of the SPY etf clearly shows that when we see panic selling in the NYSE which I consider 15+ sell orders to each buy order to be PANIC SELLING. This is shown using the purple indicator at the bottom of the chart. Today there was an average of 37 sell orders to every buy order which tells me the majority of traders are closing out all their long positions.

In an uptrend this indicator works very well and can help time a bottom within 1-4 days. As you can see on the chart below we just had a huge sell off and everyone seemed to be exiting their positions. This panic selling tends to carry over for a couple sessions until the majority of traders around the globe are finished selling.

The problem with this indicator is that in a down trend we tend to get these panic selling spikes regularly which means this time it may not work out because of the trendline break today which I think has officially changed the trend from up to down. Because of this possible down trend starting I feel its best to wait and see if it’s a dead cat bounce or if there are real buyers behind it, then we will take action to go long or short the market.

Market Internals – Put/Call Ratio & NYSE Advance/Decline Line – 60 Min Charts

Here are two charts which are currently at extreme levels. This typically means we a bounce should occur the following day or a gap higher. If you did not know there was a strong trendline breakdown today you most likely would have taking a small long position into the close.

The Put/Call ratio when above 1.00 means more people are buying put options, meaning they are leveraging themselves to make money if the market drops. As a contrarian indicator, if everyone is buying leverage to the down side then they should have sold their long positions already. That would mean most of the selling has already taken place in the market thus it should have some upward bias in the near term.

On the other side you can see the NYSE A/D line which shows how many stocks on the NYSE are advancing and how many have moved lower. When this indicator is below -1750 then we know the market is oversold on a short term basis and there should be some upward bias in the near future.

Now Lets Take A Look At Gold

Gold was left on the side of the road today as traders and investors focused on the equities market. I was actually a little surprised that it didn’t make a big move today because the US Dollar rocketed higher for the entire session. Anyone who has been watching gold closely already knows that gold is doing its own thing now… Some days it moves with the dollar, other days it does not… its become much more random than it used to be.

Anyways it looks to be forming two patterns… first one is a bull flag. If a breakout to the upside occurs that would send gold to the $1230-40 level.

The second pattern is a mini head and shoulders pattern which would send gold down to the $1180 area if the neck line is violated. It is a very tough call for gold.

Mid-Week Technical Traders Update:

In short, it’s going to take a day or two before we get a feel for the SP500 as we wait to see if it bounces with volume behind it. I personally would like a bounce so we can short it. It is unfortunate how the market broke down today. We were so close to getting a really good setup in either direction but the FOMC meeting shook things up and caused the large gap which in turn made a large group of traders miss that beautiful drop… It’s frustrating when you wait for something only to have a piece of news mess things up. That’s just part of trading though.

As for gold, I feel it’s a 50/50 trade and could go either way so I am not going to take a position right now. I’m just going to wait for the market to tip its hand a little more before I jump.

I hope you found this information useful. If you would like to receive these trading reports, updates and ETF alerts be sure to visit my service at: www.TheGoldAndOilGuy.com

Chris Vermeulen

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Learning How to Profit from Theta When Trading SPX Options

J.W. Jones
As discussed in the first article, “The Hidden Potential of Learning How to Trade SPX and Gold Options” I pointed out that there are several fundamental principles that must be mastered before profits can be attained when trading options. Novice traders typically skip the discussion about “The Greeks” and skim over volatility only to watch their precious trading capital disappear.

As promised, this article and future articles are going to discuss the Greeks as they relate to options trading in a way that hopefully everyone reading this can understand. While there are more than ten Greek symbols that directly relate to option pricing, an option trader must be able to clearly articulate and understand 4 of the ancient Greek symbols and one English invention. (Vega is not a true Greek symbol-Look it up!)

The five core Greek symbols which are critical in order to understand are as follows, in no particular order: Delta, Theta, Vega, Gamma, & Rho. Most veteran option traders have a sound understanding of Delta, Theta, Vega, & Gamma. Rho is not nearly as well known, but anyone who has ever studied econometrics, option pricing models, or has studied applied finance know all too well the importance of Rho. For inquiring minds, Rho measures sensitivity to current interest rates.

Today’s article is going to focus on the Greek symbol Theta. By now many readers may wonder why I continually capitalize the Greek symbols, and the reason is because they are that critical. The technical definition of Theta derived directly from Wikipedia when applied to options is as follows:

THETA – T, measures the sensitivity of the value of the derivative to the passage of time: the “time decay.”

Time decay (Theta decay) is of critical importance when an option trader is attempting to quantify and/or mitigate risk. There are two parts factored into the price of an option contract: extrinsic value (a major component of extrinsic value is Theta; the other is implied volatility) and intrinsic value which would be the amount of money a trader would gain if they exercised an option right away. A great many authors who opine about options get caught up using terminology like intrinsic and extrinsic value which only serves to confuse most novice option traders even more. I refuse to use those words in my writing as I find them to be cumbersome and option trading can be made much more difficult than it needs to be.

Theta and time decay are synonyms when discussing options. An easy way to remember their congruence is that the word time starts with a “T” as does Theta. If a trader owns calls or puts outside of any type of spread, they are totally exposed to time decay (Theta) and as an option contract gets closer to expiration, the time value of the contract diminishes. This accompanied with failure to account for implied volatility (to be discussed in the future) are the fundamental reasons why so many people lose money when trading options.

Just as theta can be an option trader’s worst enemy, it can also be used as a profit engine. If an option trader sells an option contract to open the position, that option trader is using theta as a method to profit or as a way to reduce the cost of a spread. While this article will not spend a ton of time discussing various option spread techniques, in the future we will discuss them in detail. At this point, we are only attempting to understand that Theta represents the time decay priced into an option.

It is also critical to understand that Theta (time decay) is not linear in the time course of the life of an option and accelerates rapidly the final two weeks before an option expires. The rapid time decay the final two weeks before expiration presents a multitude of ways to drive profitability, but it also can represent unparalleled risk. While this article is just an introduction to Theta, the next article later this week will continue the time decay discussion.

Since we are discussing Theta, I thought it would make sense to discuss a trade I took last week which utilized Theta as the profit engine. Recently a variety of underlying indices, stocks, and ETF’s have options that expire weekly. Weekly expiration expedites Theta and gives option traders additional vehicles to produce profits.

While most equity or futures traders might shy away from a chart like this, an option trader has the unique ability to place a high probability trade. I believed that the market would stall around the SPX 1130 area so I looked for a trade which would utilize the SPX weekly options. The SPX weeklies expire based on the Friday SPX open. With the SPX trading around 1124, I put on a call credit spread which used time decay as the primary profit engine.

The setup I used involved selling an 1150 SPX call and buying an 1175 SPX call, which is also known as a vertical credit spread. I received $100 (1.00) for the 1150 SPX call and purchased the 1175 call for $20 (0.20). The $80 dollar profit represents the maximum gain per contract sold. As an example, if I placed this trade utilizing five contracts per side I would have a maximum gain of $400 dollars. The probability of success at the time when I placed this trade was around 78% based on a log normal distribution of the price of the underlying.

Immediately after placing the trade I utilized a contingent stop order that would close my trade entirely if the SPX reached the 1135.17 area. Essentially, my maximum loss not including commissions was limited to around $60 dollars per contract with a maximum gain of around $80 per contract assuming we did not get a big gap open.

Essentially, if the SPX stayed below 1135.17 for two days and opened on Friday below the 1150 level my trade would reach maximum profitability. This is a trade I actually placed on Tuesday afternoon, however I exited the position before the close on Thursday due to the impending jobs report which was set to come out Friday morning. I was able to collect over 60% of the premium sold per contract ($80) which came to about $45-50 per side. At $1,000 dollars risked based on my stop level, the trade would have produced a net gain of around $750 dollars in less than 3 days.

Hopefully this basic example illustrates the potential profits options can produce if they are traded appropriately with risk clearly defined while having hard stops in place. This trade produced a nice profit, however it was susceptible to a gap open, thus I maintained a relatively small position to mitigate my overall risk profile. As always, a trader must see potential risks from all angles and utilize proper money management principles when determining how much capital to risk. In closing, I will leave you with the insightful muse of famed trader Jesse Livermore, “A loss never troubles me after I take it.”

If you would like to continue Learning about the Hidden Potential Pptions Trading Can Provide please join my FREE Newsletter: www.OptionsTradingSignals.com

J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized.

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Volume by Price Reveals Key Support & Resistance Levels

August 8th
I find it amazing how many traders do not use volume as a factor in their trading decisions. I believe it’s always important to track the volume no matter which time frame you are trading simply because it tell you how much interest there is for that investment at that given time and price level. If you use volume and understand how to read it when located at the bottom of the chart which is the standard way of reading it then your well ahead of many traders and just may find this little volume indicator helpful.

Price and volume are the two most important aspects of trading in my opinion. While news and geopolitical events cause daily blips and in rare occasions change the overall trend of an investment, more times than not its better to just trade the underlying trend. Most news and events cannot be predicted so focusing on the price action and volume helps tell us if investors are bullish or bearish for any given investment.

Below are a few charts showing the volume by price indicator in use. Reading this indicator is simple, the longer the blue bars the more volume had traded at that point. High volume levels become key support and resistance levels.

SPY – SP500 Exchange Traded Fund

As you can see on the chart below and I have pointed out key support and resistance levels using the volume by price indicator. The thin red resistance levels would be areas which I would be tightening my stops and or pulling some money off the table.

The SP500 is currently trading at the apex of this wedge. The market internals as of Friday were still giving a bullish bias which should bring the index up to resistance once more on Monday or Tuesday. From there we will have to see if we get another wave of heavy selling or a breakout to the upside.

GLD – Gold Exchange Traded Fund

Gold has the opposite volume to price action as the SP500. We are seeing a lot more over head resistance and that’s going to make it tough for gold to make a new high any time soon.

USO – Crude Oil Trading Fund

Crude oil broke out of is rising wedge last week and has started to drift back down as traders take profits. Many times after a breakout we will see prices dip down and test that breakout level before continuing in the trend of the breakout. I should point out that there is a large gap to be filled from last Monday’s pop in price and we all know most gaps tend to get filled.

UUP – US Dollar Exchange Traded Fund

The dollar has been sliding the past 2 months and it’s now trading at the bottom of a major support level. If the dollar starts to bounce it will put some downward pressure on stocks and commodities.

Weekend ETF Trend Conclusion:

In short, I feel the market has a little more life left in it. I’m expecting 1-2 more days of bullish/sideways price action, after that we could see the market roll over hard. It’s very likely the US dollar starts a significant rally which will pull stocks and commodities down.

With the major indices and gold trading at key resistance levels, traders/investors ready to hit the sell button, and the dollar at a key support level I think its only a matter of time before we see a sharp snapback. That being said there is one scenario which is bullish and could still play out. That would be if the US dollar starts to flag and drift sideways for a week or so, and for stocks and commodities to also move sideways before taking another run higher. Watching the intraday price and volume action will help us figure out if buyers are sellers are in control this week. Anyways that’s it for now.

If you would like to receive my ETF Trading Alerts visit my website at: http://www.thegoldandoilguy.com/specialoffer/signup.html

Chris Vermeulen

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The Hidden Potential of Learning How to Trade SPX & Gold Options

J.W. Jones
Market technicians believe they operate in a world that few people truly understand. It is as if they believe they are working in some sort of secretive financial construct that only a few lucky souls away from Wall Street can access. The truth is that technical analysis should only be used as one metric to help a trader navigate financial markets.

There are a variety of research methodologies which all shed light and offer clues where the market may be heading. Market internals, the volatility index, Fed speak, and even fundamental analysis can be helpful to traders. It would not make sense to ignore market information that provides greater insight and additional clues that can help give a trader an edge. After all, the edge is what all traders seek. The sweet spot in trading is having a trading system that gives you an edge and offers a variety of way to quantify, mitigate, and define risk.

The same traders that only look to use purely technical analysis in their trading also fail to recognize other investment vehicles which might offer advantageous returns. The best kept secrets are always kept in the open, right beneath the public’s proverbial nose. People will travel the world in search of secrets or to prove theories, but in many cases the Holy Grail is lying right beneath their noses.

The greatest secret financial markets offer are the unbelievable potential returns that options can offer. Options offer a variety of ways to profit in a multitude of market conditions. Options offer unique profit engines that are not available or even possible when trading stocks or bonds. Most traders overlook options or are simply unwilling to put in the time or effort to learn how to trade them appropriately. In doing so, they are walking away from huge opportunities.

Most novice traders are quick to spurn options as they consistently lose money when trading them. The most common reason novice option traders experience losses is that they do not do their homework beforehand. New option traders fail to recognize the importance of “The Greeks.” Option traders not only have to be cognizant of the volatility index, but they have to be proficient in the dynamic factors that impact option prices such as implied volatility. In the future, my articles will be focused with the intent to educate readers about “The Greeks” in a way that is easy to read and understand.

Traders that utilize a trading system or that look for low risk entries find themselves sitting idle when market conditions are not favorable for their trading system or when prudent entries have not presented themselves. The ability to trade options gives a trader another investment vehicle that can offer potential profits. In most situations, options can offer attractive returns while taking significantly less risk than trading stocks, ETF’s or bonds.

In order to illustrate a situation where options can present a better risk versus reward, we need to look no further than intraday market action in the S&P 500 on August 2nd. The market rallied from the previous close and was bumping up against significant resistance. Traders could have been looking to get long or short based on recent price action. The market had been consolidating, and a significant move was likely coming.

Clearly the market was at a crossroads and a breakout could be right around the corner, or the market could test recent highs only to turn down to retest recent support. Stock traders have to make a decision about direction or sit on the sidelines and let others do the heavy lifting. Option traders could put on positions that have a directional bias, or they could utilize time decay (theta) as a profit engine.

Through the use of spreads such as an iron condor or a butterfly spread, option traders can actually put on a position that has the ability to be profitable regardless of which direction SPY goes. In order for a spread to work, SPY’s price must stay within the confines of the spread which is also determined by the specific option strike prices selected by the option trader. Similar to the mechanism that drives asset pricing, the more risk an option trader takes the greater their return. If a spread is written that is extremely wide and thus less risky, potential returns diminish.

Ultimately, this is a recent example of how options can offer more than just leverage, but a totally different methodology that can produce outsized profits. In the future, we will dissect the various spreads and the profit engines that drive them. However, before we begin detailed discussion of various option strategies, option traders must have a sound understanding of various volatility principles as well as the impact that the Greek’s have in the world of options. In closing, I will leave you with the muse of George Orwell, “To see what is in front of one’s nose requires a constant struggle.”

If you would like to continue learning about the hidden potential options trading can provide please join my FREE Newsletter: www.OptionsTradingSignals.com

J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized.

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Gold and Oil Shine Compared to the SP500

Wednesday August 4th
Commodities have been shining recently as the US Dollar loses its luster for investors. Also the weakening dollar has helped boost equities as a lower US dollar helps the large multi national companies. This report is a quick follow up from the Weekend report showing what the odds were favoring which was higher gold, oil and sp500. As of today each investment is unfolding as planned, once candle at a time.

GLD – Gold ETF Trading

In my last report I pointed out how gold needed to break through its down trendline, the MACD had to crossover and then we needed to wait for a pullback which ends with a reversal candle to the upside. It seems gold is working its way through that process now.

Today’s Pop & Drop is not bullish price action and I expect we see a couple more down/sideways days before higher prices are reached. There are two bullish ways gold could pullback. First one would be a drop to $115 area with below average volume which could form the right shoulder of a reverse head & shoulders pattern, or we could see prices just fade sideways on light volume for 2-4 days before another up move starts.

USO – Oil Trading Fund

Oil just had a 3 day pop and with today’s doji candle the chart is saying it needs a breather. That also falls inline with the price of the US dollar which should continue higher tomorrow (Thursday Aug 5th) putting downward pressure on crude oil.

SPY – SP500 ETF Trading Signals

SP500 had a nice pop on Monday taking it up to the first key resistance level. The best play would have been to buy last Thursday or Friday when it dropped down to support unfortunately the intraday charts at that time were not that healthy looking.

I am not a fan of trading breakouts because so many of them fail and you end up paying a premium for your position and they can end up going against you very quickly. Rather I focus on trying to pick things up at support or sell them at resistance.

If we see the price pause for another 1-4 days on light volume and hold above the support trendline we could have a great low risk entry point with a stop set just below support. Or we could see a pop then pullback to test the breakout level as which point we can take a long position. This play needs to mature a little more.

Mid-Week Gold, Oil and Index Trading Conclusion:

In short, Gold, Oil and the SP500 look ready for a small pullback or some sideways price action. It will be interesting to see how strong the pullback will be on the SP500. The chart pattern and volume while they favor higher prices at the moment, if the support trendline is breached then selling volume will most likely spike and a sharp decline will occur causing the SP500 to drop approximately 3% all the way down to the $109 area.

Well, that’s it for now. If you would like to test out my trading service which has a 30 day money back guarantee visit my site at: www.TheGoldAndOilGuy.com

Chris Vermeulen

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How To Take Advantage of Price Momentum – Must Read

Most traders just don’t have the time to track the market on an intraday basis. Crazy thing is I found a way that takes advantage of the intraday price action ever needing to look at a single intraday chart. Now we can swing trade using the daily charts but get the added performance of watching the intraday chart price action. What also makes this strategy exciting is that it works with virtually any time frame, thought each time frame and investment vehicle will require its own custom settings in order to track properly.

I call this strategy a Momentum Trend Crossover. It’s based on 2 moving averages that use intraday day, or intra-bar price action to calculate its value. And a Donchian channel to track recent highs/lows for protective stop placement.

Below are three charts showing how it looks and works.

Close Up Of Momentum Crossovers – 30 Minute Chart

The chart below clearly shows how the two average track very closely to another. They both have slight variations in how they calculate their value. In short, when the blue moving average crosses below the red the market is in distribution mode (down trend/sell bounces). And it’s the opposite for when the blue trend line crosses above the red which is accumulation mode (up trend/buy dips).

The Donchian channel is used for entry and protective stops. This indicator has three parts, the upper, middle and lower bands. It tracks the most recent highs and lows providing clear protective stop levels for each trend.

60 Minute Chart – Moving Average Trend Trading Chart

This is an example of a 60 minute chart which I find very helpful in catching decent size trades. As you can see when the moving averages crossover the market reverses direction. The really cool thing about this is that there is almost zero lag in this indicator. Many times the cross over happens before the price starts to drop.

For best results I always make sure the next larger time frame is in favor of the trade I am looking to take. Doing this increased the probability that more trades will become profitable.

30 Minute Chart – Short Term Trend Trading

This chart shows key reversals and low risk entry points using the Donchian channel and moving average price levels. I know these are intraday charts I am showing you but it can be used with daily weekly and monthly charts also. The intraday charts really show it in action and how choppy market conditions can be filtered to be smooth.

Momentum Trend Crossover Benefits:
• Can be applied to any investment vehicle – Stocks, ETFs, Futures, Currencies
• Customizable to work with any time frame
• The trend is your friend and this always keeps you inline with the trend.
• Eliminates the noise in the market during choppy conditions
• Reduces emotions because you instantly can see when to enter and exit positions

My Thoughts On This Trading Model

I have never been a fan of Moving averages because they lag the market so much. Over the years watching intraday price action in conjunction with the daily chart I found a way to make the moving averages carry over the intraday strength/weakness which in turn gives us an almost real-time, if not early signal about a trend change.

This is one of the strategies I use within my trading newsletters to help generate low risk trading signals. Takes some of the guess work out of trading, that’s for sure!

If you would like to get my trading alerts and learn more about this, please go to www.TheGoldAndOilGuy.com to see what I have to offer.

Chris Vermeulen

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How to Trade Trend Line Breakouts

As we all know there is an unlimited amount of ways to trade the financial markets. Each person sees the market in a different way, has different skill sets, trading experience and risk tolerance levels. While some individuals create and use complete systems to make money there are some very basic trading strategies which still work well and require nothing more than basic charting, patients and a little money management.

Let me explain:

SPY – SP500 Index Trading Fund

You can clearly see the longer term trend which is down (blue trendine). But from simply drawing a couple trendlines and looking at the MACD (momentum) indicator you can see there is a possible trend reversal taking place. So far the SPY has broken out of its down trendline with a 4 day pop, and it’s now pulled back down to test support. A close below the trend line or the 50MA would be the exit points if the market did start to go south.

The SP500 is still stuck under major resistance, its 200 day moving average. But is trading above key support levels (20MA, 50MA and Trendline). I can feel the tension in the market between traders and we are about to see a big move once a breakout to the upside or down side is established. At this time its best to be in cash or have a small position with a protective stop in place. Once a trend starts there should be some low risk entry points along the way. If we see a strong reversal to the upside On Monday or Tuesday I would expect big buyers would step in to catch this new trend up.

GLD – Gold ETF Trading Fund

Looking at the price of gold we can see the trend is still down along with the momentum. A breakout would be the first step towards a possible entry point but I prefer to wait for a pullback after the breakout has taken place. Once we get a test of support I look to enter a position once there is a strong reversal candle to the upside. From there I draw a new support trend line from the previous low and connect it to the new pivot low (bottom of reversal candle). That becomes my new protective stop.

Gold still has some work to do before I would even be interested in taking a long position for a swing trade. But on a short term time frame (intraday charts) gold looks to be forming a low risk setup which I hope unfolds for my subscribers this week.

USO – Crude Oil Trading Fund

Oil has been trading in a large bearish pennant for the past 2 months and it is nearing the apex of this pattern. The longer term picture of oil is bearish but the most recent dotted trend line and the 20/50MA crossover is signaling some strength. Also the momentum for oil is positive and that helps support the price also. Again if this was to breakout to the upside I would wait for a low volume pullback to test the breakout level, then enter on a reversal back up.

Oil is one of the more challenging commodities to trade because it is affected by the US Dollar, Political Events, and Weather. In short, even if you had the analysis and timing correct there are other factors which move the price of oil on a regular basis that could quickly turn the trade against you. That being said, keep trades small when trading oil.

How to Trade Trend Line Breakouts Low Risk Trading Setups:
In short, trading can be complex, simple or somewhere in between. You can spend 14 hours or 20 minutes a day analyzing it depending on what investments you trade, whether you’re trading full time or just checking up on longer term investments.

This analysis and basic strategy shown above can be profitable if followed correctly and works for stocks, commodities and indexes. It’s just to show how simple one can swing trade the market using very basic analysis. Personally I use a much more complex strategy incorporating 15+ other data points which allows for precise entry and exit points.

If you would like to get my Low Risk Trading Newsletter visit my services at:
www.TheGoldAndOilGuy.com – ETF Trading – Index, Sectors & Commodities
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Chris Vermeulen

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Financials, Oil & Gold on the Move

Most traders I have been talking with are feeling the same thing. Something big is brewing for the equities market but most do not want to get heavily involved until there is a clear direction. The broad market has been consolidating for almost 3 months and it’s important to remember that the larger the consolidation the bigger the move.

Also the biggest and best moves come from failed patterns. So is the big head & shoulders pattern on the SP500 which everyone is yelling about (the sky is falling) really going to happen or is this the BIG fake out? Only time will tell, either way no matter which way it goes I will be sure to catch some of it.

Below area few charts pointing out patterns and trends which could provide some opportunity in the coming days or weeks.

XLF – Financial Sector ETF
Financials play a large roll in moving the major indexes so if this reverse head and shoulders patter breaks out to the upside then the indexes should rally and XLF etf could reach its measured move of $16.50.

USO – Crude Oil Fund
Crude oil almost looked like it was going to breakout and mover higher this week but sellers jumped in sending it lower once again. The daily chart shows a large bearish pennant which is known as a continuation pattern. So it looks as though we should see lower prices for oil.

GLD – Gold Bullion ETF
Gold has been sliding lower for several weeks now and it looks to be showing selling exhaustion. The 5th wave down with the volume spike indicates panic selling as investors cannot hold onto those positions any longer and exit. This is a bullish sign for gold. Also we are seeing gold fall deep into a support level along with the 200 day moving average.

Mid-Week Financial, Oil and Gold Trading Conclusion:
In short, the equities market is in limbo until a clear trend is established. If the financial sector breaks out to the upside then we should see a sizable rally. As for oil it looks to be trading in near the middle of its range but is still in a down trend overall. Gold is almost looking ready for a bounce but I am waiting for more confirmation before jumping on the wagon.

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Chris Vermeulen

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How To Be Positioned for SP500, Gold & Oil

The second half of last week we saw some strong price action in the equities market. The SP500 broke through the 5 and 50 day moving averages closing the week just under key resistance levels. The SP500 futures will find resistance at the June high $1099.25, $1100 which is whole number then at $1103 which is the 200 day moving average. Each of these are clumped together making it really just one solid area which sellers will be waiting to short the market.

The market momentum and internals are looking strong for the equities market overall. With last weeks strong close we have seeing the percentage of stocks closing above their 50 and 200 day moving averages surge from 40% to 68% from the previous week. Stocks closing above their 20 day moving average jumped from 40% to 82% from the previous week. Seeing this type of shift in the market Momentum is generally a bullish indicator.

From a quick glance at the internals it looks as though Monday will trade flat/negative for the session. Reason being is that the NYSE Advance/Decline line is telling us the market is overbought when looking at a short term time frame. I would expect some selling Monday or possibly we get a gap up, then a sell off early in the session while the market digests last weeks strong closing.

Gold

Bullion has been giving mixed signals for while now. It looks like there has been a possible ABC retace, but on the other hand it looks to be forming a stair step pattern lower (series of bear flags). Until we get something more concrete from the charts lets just keep our eye on it for now.

Crude Oil

The past month we have seen oil form a bear flag which generally leads to lower prices. That said oil continues to grind its way higher closing at a key resistance level. This could be a possible double top before heading lower or we could get a breakout and rally this week. I know that does not sound helpful but remember oil is very sensitive to weather (hurricanes), US Dollar and geopolitical events making it much more unpredictable than one may think. That said I am not trading it right now.

Pre-Week Trading Warm Up:

I feel the equities market has some strength behind it. But we must see the SP500 futures contract close strongly above the $1103 area. With the market overbought and trading at resistance I am favoring some early weakness Monday

As for the gold and oil, I am just going to keep an eye on them. I’m just not feeling/seeing the patterns which I find tradable at the moment for a low risk setup.

Quick Trading Tip: I try to always analyze and trade the market the way which has always worked for me. Keeping my emotions in control and filtering out as much news, events and opinions as possible so I can think clearly while I focus on my low risk setups. The past couple months have had big news and events unfolding making it harder for traders to stay focused. It is crucial for traders to step back and clear their heads from all the news, hype and opinions shared across all the mediums and just look at a simple chart analyzing the price, volume and trend.

If you would like to receive my Free Weekly Trading Reports or my ETF Trade Alerts be sure to visit my website at: www.GoldAndOilGuy.com

Chris Vermeulen

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