, , , , ,

70 Second Market Outlook – Metals, Dollar, Bonds, Stocks, Energy

Over the past year we have had some really interesting things unfold in the market. Investing or even swing trading has been much more difficult because of all the wild economic data and daily headline news from all over the globe causing strong surges or sell offs almost every week.

For a while there you could not hold a position for more than a week without some type of news event moving the market enough to either push you deep in the money or get stopped out for a loss. This has unfortunately caused a lot of individuals to give up on trading which is not a good sign for the financial market as a whole.

The key to navigating stocks which everyone thinks are overbought is to trade small position sizes and focus on the shorter time frames like the 4 hour charts. This chart is my secret weapon and giving you both large price swings which daily chart traders focus on while also showing clear intraday patterns to spot reversals or continuation patterns with precise entry/exit points.

While I could ramble on about why the stock market is primed for major long term growth from this point forward I will keep things short and simple with some 4 hour and daily charts for you to see what I see and what I am thinking should unfold moving forward.

Keep in mind, the most accurate trading opportunities that happen week after week are the quick shifts in sentiment which only last 2-5 days at most which is what most of my charts below are focusing on…

Dollar Index – 4 Hour Chart

This chart shows a mini Head & Shoulders reversal pattern and likely target over the next five sessions. The dollar index has been driving the market for the past couple years so a lower dollar means higher stock and commodity prices.

Dollar Index Trading

Bond Futures – 4 Hour Chart

Money has been flowing into bonds for the past couple weeks with most traders and investors expecting a strong correction in stocks. As you can see the price of bonds hit resistance this week and as of Thursday has now started selling off. Money flowing out of this “Risk Off” asset means money will move to the “Risk On” investments like stocks and commodities.

Bond Futures Trading

Gold Futures – Daily Chart

Gold is stuck in both categories in my opinion. It is a “Risk Off” safe haven when people are scared of falling stock prices, and it is also a “Risk On” speculative investment when people are feeling good about the market. Gold has been trading at key resistance for a couple weeks and looks as though it’s starting its next rally.

Gold Futures Trading

Silver Futures – Daily Chart

Silver is in the same boat as gold though it carries much more volatility than gold. Expect 2-4% swings regularly and sloppy chart patterns in this metal.

Silver Futures Trading

SP500 Futures – Daily Chart

As much as everyone hates to buy stocks up at these lofty prices I hate to say it but I think they are going to keep going up and they could do this for a long time yet. If the dollar index continues to break down then I expect the SP500 to rally another 3% from here (1500) in the next 1-2 weeks.

SP500 Futures Trading

Crude Oil Futures – 4 Hour Chart

Crude oil has not had much attention from me in the past few months. While it has had big price action many of those big days took place on news causing an instant price movement making this extra dangerous to trade. I continue to watch rather than get attached to it.

Crude Oil Futures Trading

Natural Gas Futures – Daily Chart

Natural gas has been a great performer for us in the past 6 months as all the short positions slowly get covered. I just closed out my natural gas ETF trade this week with a 31.9% gain and plan on getting back in once the chart provides another low risk setup.

Natural Gas Futures Trading

Trading Conclusion:

In short, I feel the dollar index along with bonds will correct over the next few weeks. That will trigger buying in stocks and commodities. Keep in mind natural gas dances to its own drum beat. The dollar does not have much affect on its price and most times natural gas is doing the opposite of the broad market. Get My Pre-Market Trading Analysis Video and Intraday Chart Analysis EVERY DAY – www.TheGoldAndOilGuy.com

Chris Vermeulen

, , , , , , , , ,

Gold Hits Record High in Euros and it’s Setting Up for Another Rally

The price of gold hit a record high this past week . . . in euro terms (at about 1380 euros). The record came after a number of actions by central banks around the world, trying to stimulate their respective economies. The actions, usually centered around money printing, once again had investors looking for refuge in gold.

Since the beginning of September, investors have bought about 75 tons of gold through exchange traded funds. Reuters says that gold ETFs, such as the largest gold ETF – the SPDR Gold Shares (NYSE: GLD), are on track for their biggest quarterly inflows in over a year, of 3.285 million ounces. Finally, according to UBS, investors have also raised their bullish bets on gold futures to the highest level in more than a year.

All the world’s major central banks took action recently including the Bank of Japan which launched a fresh round of monetary stimulus. The main action though was centered in Europe and the United States. The European Central Bank has promised to buy an unlimited quantity of eurobonds going forward. And the Federal Reserve announced its third round of monetary stimulus, QE3, that promises to buy $40 billion of mortgage-backed securities monthly on top of its ongoing Operation Twist program of buying long-dated Treasuries.

Speaking about the monetary easing, Barclays precious metals analyst Suki Cooper put it this way to the Financial Times, “Gold finally found the catalyst it had been waiting for all year after the Fed announced open-ended quantitative easing.”

Another reason for gold’s rise in euro terms, it must be noted, is the continuing fiscal turmoil in Europe itself, particularly in Spain. Spain’s largest autonomous region, Catalonia, manages an economy as big as Portugal’s. The problem is that it has debts of 42 billion euros which it is struggling to service. Catalonia has requested a 5 billion euro temporary bailout from Spain’s central government, adding to its debt burden. In a real show of defiance, Catalonia is also refusing to implement austerity measures. Add to that, bank stress tests in Spain showed that the country’s 14 largest lenders will need 60 billion euros in new capital.

No surprise then that physical demand for gold bars and coins in Europe rose 15 percent in the second quarter, according to the World Gold Council!

Another positive fundamental reason in the corner of gold bulls is the recent currency appreciation in the Indian rupee. India is traditionally the world’s largest consumer of gold. Sales have been slow there this year due to the government trying to slow down gold sales there through rises in a gold import tax. However, the recent rise in the rupee has made gold purchases more palatable and gold sales to India have hit their highest level in two months.

So for now, many of the fundamentals look to favor a move higher for gold, although there is technical resistance at its 2012 high of $1791.

Know when to buy gold, silver, oil and stocks – www.TheGoldAndOilGuy.com

Chris Verneulen

Investor Gold Buying to Resume & Fed Doubling Their Balance Sheet AGAIN!

A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012. GFMS produces the benchmark supply and demand statistics for the gold market. GFMS forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011. This surge in demand for the yellow metal, GFMS says, will move gold above the $1850 an ounce level, not far from the record high of $1920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe. Primary among the recently announced stimulus plans was the Federal Reserve’s QE3 or as some in the market have called it, QE infinity. Philip Klapwijk of GFMS said that, for the gold market, “QE3 has become talismanic”.

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer-dated U.S. treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

The main characteristic of QE3 that drives the gold market is the fact that the open-ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it’s not just about a fear of future inflation being ignited by all this money creation. It’s a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed’s own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed’s assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too…the Fed’s assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve’s assets. Do not be shocked if that pattern continues over the next five or ten years too.

Get my Trading Alerts and Pre-Market Analysis Videos EVERY DAY – www.TheGoldAndOilGuy.com

Chris Vermeulen

, , ,

Arab Spring and Oil Prices

Crude oil prices hit a four-month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open-ended  commitment to purchase $40 billion of mortgage-backed securities monthly.

The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel. It maintained its roughly $18 premium to U.S.-based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non-futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO).

The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others. The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus.

Saudi Arabia in particular is key because it accounts for more three-quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’.

The reason behind the change in attitude is simple…Arab Spring.

Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens. It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues.

Much of this increased spending will go toward upgrading the country’s infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets. This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago!

Unfortunately for oil consumers, this trend looks set to continue in years ahead. According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place.

So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

Keep up to speed on the oil and precious metals markets with my free newsletter: www.GoldAndOilGuy.com

Chris Vermeulen

, , , , ,

Silver at Multi-Month High

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

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

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

Silver Bullion Spot Price

Gold Bullion Spot Price

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

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

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

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

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

Chris Vermeulen

, , , , , ,

Gold Standard To Be Reinstated Through The Back Door

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

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

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

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

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

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

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

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

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

Gold Bullion Trading

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

Chris Vermeulen

 

, , , , ,

The Precious Metals MAJOR Breakout Part II

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

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

 

Gold, Silver and Dollar Weekly Price Chart:

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

Weekly Metals Outlook

 

Gold Miners ETF Weekly Chart:

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

GDX - Gold Miner Stock ETF

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

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

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

Chris Vermeulen

, , , , , ,

Gold and Copper Rising Due to QE3 Hopes

There should be an inverse relationship between gold (NYSEARCA: GLD) and copper (NYSEARCA: JJC).

Most of gold is used for investment purposes.  As a result, it rises when there is economic weakness and investors lose confidence in the fiat currency of a country.  Most of copper is used for industrial purposes.   Therefore, the price of The Red Metal should increase when economies are booming, as there is a greater demand for it from the factories operating at full throttle and for the buildings being constructed.

Gold Bullion Prices

Gold Bullion Prices

As the chart below evinces, the inverse relationship between the exchange traded for gold, SPDR Gold Shares, and the exchange traded fund for copper, iPath Copper, has broken down due to traders positioning themselves for the introduction of Quantitative Easing 3 when Federal Reserve Chairman Ben Bernanke speaks at Jackson Hole this Friday.

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

Both the JJC and the GLD have risen together as traders expect more economic stimulus from the United States Government.  This will weaken the US Dollar and raise the price of commodities, as happened with Quantitative Easing 2.  During the period of Quantitative Easing 2, from November 2010 to June 11, the US Dollar fell in value and the GLD and the JJC soared, along with other commodity prices, particularly oil.  This pattern is being repeated as traders are preparing for the initiation of Quantitative Easing 3 when Bernanke speaks Friday, or at the next Federal Open Market Committee meeting.

Gold Spot Price Chart

Gold Spot Price Chart

 

TheTechnicalTraders Analysis & Trade Idea Delivered To Your INBOX!

, , ,

Monitoring Implied Volatility is Critical for Option Traders

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

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

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

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

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

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

Implied Volatility Option Trading

Implied Volatility Option Trading

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

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

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

Option Trader Newsletter

Option Trader Newsletter

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

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

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

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

 

Implied Volatility P&L Graph

Implied Volatility P&L Graph

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

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

Happy Trading!

Simple ONE Trade Per Week Trading Strategy?
Join www.OptionsTradingSignals.com today with our 14 Day Trial

JW Jones

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