Archive for year: 2022

The recent downward Crude Oil trend may have caught many traders by surprise. Just before the US Fed raised interest rates on June 15, 2022, Crude oil was trading above $120ppb. Less than 5 days later, it collapsed -12% and has continued to trend lower. Currently, Crude Oil is near -17% lower than recent highs.

It appears Crude Oil has confirmed resistance near $120 and is devaluing as consumers pull away from traditional driving/spending habits while the Fed aggressively attempts to burst the inflation bubble. This type of contraction in Crude Oil is very similar to what happened in 2008-09 when the Global Financial Crisis (GFC) hit – Crude Oil collapsed more than -70% after IYC started trending lower in 2007.

Consumer Discretionary Spending May Be Leading Crude Oil Downward

On June 9, 2022, I published a research article (CRUDE OIL PRICE AND CONSUMER SPENDING – HOW THEY ARE RELATED) highlighting the correlation between Crude Oil and the Consumer Discretionary ETF (IYC). In this article, I suggested any breakdown in IYC, below $60, may prompt a broad downward price trend in Crude Oil – possibly targeting the $75 to $85 price level.

Looking at this chart from our June 9, 2022 article, we can see IYC has already fallen more than -34% from recent highs. In 2007, peak oil prices were reached well before IYC declined more than -22%. So, in this case, the recent decline in IYC may already be predicting a downward price trend in Crude Oil – possibly targeting levels below $80 eventually.

(Our Crude Oil/IYC Chart from the June 9, 2022 article)

Aggressive Fed Action May Prompt Extreme Consumer Actions

In an oddly similar way, the 2008-09 GFC represented an extreme excess/speculative phase in the US Credit/Housing markets. Today, we see many similar facets after the COVID-19 event – where house prices skyrocketed from +25% to +45% in some areas. Additionally, prior to 2007-08, we saw moderately high inflation levels, Crude Oil was trading above $100 ppb, certain commodities were in very high demand, and consumers were spending aggressively on almost everything.

Today, we see a combination of some factors from the GFC as well as the DOT COM bubbles. Not only have house prices and raw commodities seen incredible rallies over the past 5+ years, but the Technology and Innovation sectors have also been leading market gains as well. Bitcoin rallied from under $1000 to a high of nearly $70,000 over the past 5+ years. The excessive speculation in the global markets recently is clearly evident in many various sectors and assets.

Global Central Banks Are Running The Show (Again)

I believe the US Federal Reserve will continue to raise rates aggressively in an attempt to tame inflationary trends. At the same time, we are likely to see many Global Central banks attempt to follow the US Fed in raising rates. This creates an economic environment many traders are unprepared for – an extended stagflation/recession period.

The downward trend in Crude Oil and IYC may be the “canary” for the global economy and what to expect going forward. When consumers pull away from traditional pending habits, we are likely to see a broad contraction in global GDP and other economic factors.

Traders and investors need to stay cautious of various global market trends and move back towards a more traditional method of managing their capital. The global markets are still 3x to 5x more volatile than at any time in recent history. Any aggressive trading style could lead to massive losses – as we are likely to see in many global Hedge Funds and managed accounts.

LEARN FROM OUR TEAM OF SEASONED TRADERS

With the market environment and crude oil trend, it’s imperative to assess our trading plans, portfolio holdings, and cash reserves. As professional technical traders, we always follow price. At first glance, this seems very straightforward and simple. But emotions can interfere with a trader’s success when they buck the trend (price). Remember, our ego aside, protecting our hard-earned capital is essential to our survival and success.

Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:

• A loss of 10% requires an 11% gain to recover.
• A 50% loss requires a 100% gain to recover.
• A 60% loss requires an even more daunting 150% gain to simply break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown:

• A 10% drawdown can typically be recovered in weeks to a few months.
• A 50% drawdown may take many years to recover.

Depending on a trader’s age, they may not have the time to wait nor the patience for a market recovery. Successful traders know it’s critical to keep drawdowns with reason, as most have learned this principle the hard way.

HOW WE CAN HELP YOU LEARN TO INVEST CONSERVATIVELY

At TheTechnicalTraders.com, my team and I can do these things:

• Safely navigate the commodity and crude oil trend.
• Reduce your FOMO and manage your emotions.
• Have proven trading strategies for bull and bear markets.
• Provide quality trades for investing conservatively.
• Tell you when to take profits and exit trades.
• Save you time with our research.
• Proved above-average returns/growth over the long run.
• Have consistent growth with low volatility/risks.
• Make trading and investing safer, more profitable, and educational.

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We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

US and Global markets recoiled from the higher inflation/CPI data last week. The US Fed raised interest rates by 75pb on June 15. The Fed also warned that other, more aggressive rate increases might be necessary later this year. Before the Fed decision, global markets opened on Sunday, June 12, and quickly started selling downward. US Indexes sold off on Monday, June 13, by more than 2.5% almost across the board. A brief rally after the Fed decision seems to have evaporated in early trading on Thursday, June 16.

It is clear that global markets expected inflation to stay elevated but were hoping for some moderately lower data showing the recent Fed moves had already dented some inflation concerns. Now, it appears the US Fed has its backs against a wall and moved rates aggressively higher to stall inflation (and possibly destroy global asset values). From my perspective, this is unknown territory for the US Fed and Global Central banks. That means traders should expect increased volatility and the possibility of a very determined reversion of price over time.

Another Global Financial Crisis May Be Unfolding

The research conducted by my team and I shows some interesting new data. In particular that the US Current Account data is very near to the levels reached just before the Global Financial Crisis (GFC) in 2006 (near -$218B). I consider this a very clear sign that the US economy, inflation, consumer engagement, and asset values have continued to hyper-inflate since the COVID-19 virus event.

The chart below highlights the US Current Account data and the Dow Jones Industrial (DJI) Average price data. Notice how the lowest level of the US Current Account data reached a deep trough (September 2006) about 12 months before the absolute peak in the DJI (September 2007). This time, the US Current Account trough formed in September 2021, and the peak in the DJI happened in December 2021 – only 3~4 months later.

The global markets have continued to consume cheap US Dollar liabilities over the past 10+ years as the US Fed kept interest rates very low for an extended period. Not only did this feed an extreme global speculative phase, but it also created an extreme credit/debt liability issue throughout the globe as rates increased. Debt holders are forced to roll debt forward at higher rates if they cannot pay off these liabilities completely – being over-leveraged. This same scenario is very similar to how the GFC started. Over-leveraged speculative trading in Mortgage-Backed Securities and other global assets.

Skilled Traders Saw This Problem Many Years In Advance

I’ve been informing my subscribers that an event like this was starting to take place throughout 2020 and 2021. Below, are some of the articles posted in our blog warning traders that the global markets were transitioning away from the endless bullish price trends from 2011 through 2021.

• May 23, 2021: US DOLLAR BREAKS BELOW 90 – CONTINUE TO CONFIRM DEPRECIATION CYCLE PHASE
• November 25, 2020: HOW TO SPOT THE END OF AN EXCESS PHASE – PART I
• September 17, 2021: DID THE GLOBAL MARKETS ROLLOVER IN APRIL/MAY 2021? WHAT NEXT? PART I

NASDAQ May Fall To $9,750 Before Attempting To Find Any Support

The Technology Sector is leading the downward price trend in the US major indexes. The NASDAQ could fall to levels close to $9,750~10,750 before attempting to find any real support.

Ultimately, the NASDAQ may fall to levels near the COVID-19 lows, near $6,500. But right now, the most logical support level exists just above the COVID-19 2020 highs.

I expect this new global price revaluation may last throughout the rest of 2022 and possibly carry into early 2023. It depends on what the US Fed does and how this event unfolds. If there is an orderly unwinding of excesses in the markets, we may see an extended decline as global expectations transition to new normal economic expectations. If a new crisis event blows a massive hole in the global economy, like in 2008-09, a very sudden decline may occur – shocking the global markets.

My research suggests the US Fed is far behind the curve and has allowed the excess speculative rally to carry on for too long. Global Central Banks should have been raising rates to moderate levels near the end of 2020 and in early 2021. Now, we have an excess phase bubble similar to the DOT COM and GFC events merged. We have an extreme Technology Bubble and an excess global credit/liability bubble.

If you have not already adjusted your assets to protect from downside risks, it’s time. When doing so, please consider the long-term risks of trying to ride out any extended downtrend in price. Are you willing to risk another -25% to -40% of your assets, hoping the global markets find a bottom soon?

WHAT STRATEGIES CAN HELP YOU NAVIGATE THE CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors. Also, learn how we identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market. The markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens. This is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there? How can they be deployed in a bond replacement strategy?

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies which include a real estate ETF. We can help you protect and grow your wealth in any type of market condition. Click the following link to learn more: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Bank of America, Michael Hartnett, Chief Investment Strategist recently stated, “The bear-market rally for stocks has disappeared as investor concerns about inflation and interest rates linger.” “We’re in a technical recession but just don’t realize it.”

Freight Waves, Henry Byers reported, “US import demand is dropping off a cliff as inbound container volumes to the US are reverting to pre-pandemic levels.” Byers went on to say that “The consumer is getting crushed as conditions for the consumer seem to be getting worse and worse as inflation takes hold and prices get more and more expensive.”

We have quickly moved from seeing the dark clouds on the horizon to the start of entering the initial storm wall. The USD put in a major low on January 6^th, 2021. Since then it has been in a strong uptrend as global investors seek safety with the uncertainties about geopolitical events, record inflation, rising interest rates, slowing housing, plummeting auto sales, increasing retail inventories, expanding consumer credit, and pending layoffs.

Source: www.finviz.com

US DOLLAR ETF: UUP +16.69%

UUP remains in its uptrend as the price continues to move up from its base of accumulation.

After having a brief 2-week pullback of -3.45% UUP has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider UUP to capitalize on the strengthening US Dollar.

INVESCO DB USD INDEX BULLISH FUND ETF • UUP • ARCA • DAILY

20+ YEAR TREASURY INVERTED ETF: TBF +38.89%

TBF remains in its uptrend as the price continues to move up from its base of accumulation.

After having a 3-week pullback of -6.21% TBF has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider TBF to capitalize on the FED raising interest rates to try and curb inflation.

PROSHARES SHORT 1X 20+ YEAR TREASURY ETF • TBF • ARCA • DAILY

S&P 500 SHORT INVERTED ETF: SH +19.33%

SH remains in its uptrend as the price continues to move up from its base of accumulation.

After having a 2+-week pullback of -7.19% SH has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider SH to capitalize on the falling stock market.

PROSHARES SHORT 1X S&P 500 ETF • SH • ARCA • DAILY

VALUABLE INSIGHTS FROM SUCCESSFUL TRADERS

Market Wizards by Jack D Schwager (www.Amazon.com) is packed with insights from successful traders who have shared their wisdom based on firsthand trading experiences. Here are a few of our favorites:

Paul Tudor Jones:

• “If you have a losing position that is making you uncomfortable, the solution is very simple; get out, because you can always get back in.”
• “There is nothing better than a fresh start.”

Ed Seykota:

• “There are old traders and there are bold traders, but there are very few old, bold traders.”
• “Losing a position is aggravating, whereas losing your nerve is devastating.”
• “Good traders; Many are called, and few are chosen.”

Larry Hite:

• “We always follow the trends, and we never deviate from our methods.”
• “I have two basic rules about winning in trading as well as in life; If you don’t bet, you can’t win.”
• “If you lose all your chips you can’t bet.”

WHAT STRATEGIES CAN HELP YOU NAVIGATE THE CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens. This is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there? How can they be deployed in a bond replacement strategy?

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies which include a real estate ETF. We can help you protect and grow your wealth in any type of market condition. Click the following link to learn more: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

There are times when markets consolidate and move sideways in a relatively narrow range.  We often see low volatility, little trending, and “choppy” price action when the market is slow. 

Range-bound, consolidating markets eventually resolve in one direction or the other. Breaking out of a narrow range often takes a catalyst event like a highly anticipated economic report or – in the case of individual stocks – something like an earnings report or FDA approval. Quite often, it is the anticipation of the event itself that keeps price range-bound.  Without knowledge of the event outcome, both bulls and bears are waiting it out before making large commitments.

Buying a long Strangle

A long strangle consists of buying both an out-of-the-money call and put on the same underlying with the same expiration date.   

A long strangle is opened for a debit and can profit from a large move in the underlying. The profit potential is unlimited on the upside and can be substantial on the downside. The potential loss can be as much as the total cost of the strangle. Both options will expire worthless if the stock price is equal to or between the strike prices at expiration.

Since we are buying all-time value on both options, we might expect volatility crush and rapid theta (time value) decay after the price has broken out of the range. Therefore, we want to close such a trade after the price breakout but well before the option expiration date.

It can be tempting to have a simplistic view of buying a strangle and thinking it should be profitable regardless of direction. But there are no such giveaways in options markets.

We often see that implied volatility is high ahead of known upcoming events. That “juices” the options prices ahead of the event, and then there can be a volatility crush when the event has passed. That can make it very challenging to profit from a long strangle, which is why I rarely do them.

To consider putting on a strangle, I’m looking for a particular setup where the price is range-bound, and volatility is low before the catalyst event. That puts the probability of profit much more in my favor.

To Strangle or To Straddle?

A straddle is similar to a strangle, but the strike prices on the put and the call are equal. Traders often debate which strategy is better. 

The cost and maximum risk are lower for a strangle than for a straddle. The breakeven points for a strangle are further apart than for a comparable straddle. There is also a greater chance of losing 100% of the cost of a strangle if it is held to expiration. Long strangles are more sensitive to time decay than long straddles. When there is little or no price movement, a long strangle will experience a greater percentage loss over a given time period than a comparable straddle.

An advantage for a straddle is that the breakeven points are closer together than for a comparable strangle. There is less of a chance of losing 100% of the cost of a straddle if it is held to expiration. Long straddles are less sensitive to time decay than long strangles. When there is little price movement, a long straddle will experience a lower percentage loss over time than a comparable strangle.

I generally lean towards the strangle because of the lower debit and risk.  And since I put on the trade because I’m expecting a large move, I don’t see much wrong with my strikes being a bit away from the underlying. If I’m right and there is a significant move in price, the straddle should also perform well.  

Example Setup

This chart shows prices consolidating sideways in a narrow support/resistance range (shaded area).   This is a zone to look at putting on the strangle. 

At the yellow arrows, we see a well-qualified entry point. The price action is slow, and the volatility (purple line) is low.

Then we see the price break – in this case, to the downside along with an increase in volume (green arrows).  As price breaks out of the range, we see an increase in volatility. At this point, we may have a profit in the trade. Don’t be greedy. Take what the market gives and move on. This particular trade had a >23% return on risk in a matter of hours when the price broke down.

Summary

If a market is range-bound before an expected catalyst event and volatility is low, consider putting on a long strangle (or straddle).  The relatively low volatility is an essential part of the setup that tilts the odds in our favor.  We don’t want volatility crush and rapid time decay to rob us of the profit opportunity.  The key is to put this trade on before the price breaks out and before the implied volatility is elevated.  Once the range is broken, take profits quickly. 

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want To Learn More About Options Trading?

Every day on Options Trading Signals, we do defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for 1/3 of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs, which are always on once you own.   

Our Options Trading Specialist, Brian Benson, continues to knock his trades out of the park. Since he has joined our team at The Technial Traders he has a 78% win rate, and of the last 27 trades, 23 were winners equalling an 85% in-the-money finish!

If you are new to trading or have been trading stock but are interested in options, you can find more information at The Technical Traders – Options Trading Signals Service. Brian, who has been trading options for almost 20 years, sends out real live trade alerts on actual trades, such as TSLA and NVDA, with real money. Ready to subscribe, click here:  TheTechnicalTraders.com.

Enjoy your day!

Chris Vermeulen
Founder & Chief Market Strategist
TheTechnicalTraders.com