I hope you fellow Canadians had a great Canada Day long weekend and Happy Independence Day to those south of the boarder!
A couple weeks back on June 19th I posted my analysis on how the stock market was bottoming and that we needed a couple key sectors to participate before we would get a solid bounce. You can quickly review the charts here if you like: http://www.thegoldandoilguy.com/articles/stock-market-flashing-a-buy-signal/ .
Today’s report plays directly off the June 19th analysis showing you the price movement from then on.
SP500 – SPY ETF Daily Chart
As you can see during early June the market became volatile with a broadening formation. This type of price action is an early warning that a trend reversal is near. It was only two days later when we saw stocks make a new high, which is the first ingredient for a trend reversal to take place. But once a higher high was made sellers quickly jumped back into the market pulling price back down. Keep in mind the higher high which was made was another early sign that a trend reversal was likely to happen.
During this time I was watching the charts like a hawk keeping a close eye on the time and sales window which I have filtered to show me only orders with a market value of $3million dollar or larger. This helps me keep a close eye on what the big money players are doing… Following their coat tails if done correctly will help keep you out of the market at times and also gets you in before the masses jump on the wagon.
The two key sectors I talked about on June 19th were the Financials and Tech. Both these sectors must move up if we are to get a decent bounce/rally in the market.
Financial Sector Daily Chart:
By zooming out on the daily chart we can see in terms of both price and volume that the financial sector was at a major support level. Also it had just fallen sharply for more than a week making it oversold and ready for a bounce.
Only a couple days later financial stocks rocketed 11% higher as expected and the broad market (SP500) posted some decent gains for us also.
Let’s take a look at the financial sector:
The tech sector was in the same boat as the financials above… Tech stocks jumped an average 6%.
Weekend Trading Conclusion:
In short, I feel the market has shown us some decent upward momentum and everything is now at the point where a pause is likely. I expect some type of pause or pullback in the coming week and then the market has a major decision to make. Will it continue and start a new leg higher or roll over and die… That’s the next key question/action about to take shape and I will help guide you through these times each day with my pre-market morning video analysis.
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The past eight weeks investors and traders have been watching the market wiggle its way lower. Each new low that formed has taken place with panic selling. Panic selling puts the market into a short term oversold condition. These extreme oversold conditions are typically great for a one or two day bounce but after that the down trend takes control once again pulling stocks and commodities back down.
The question everyone is asking is where are stocks and commodities headed next?
To be honest that is a tough question because of the current market conditions. The chart below shows a green indicator at the bottom and when that indicator spikes up it means there is panic selling in the market. Typically after multiple waves of panic selling we see stocks and commodities bounce/rally.
So looking at the SP500 daily chart below you can see there are two possible scenarios. First one for lower prices and wild price swings (consolidation), the second is a dip within the bull market uptrend.
Personally I would prefer to see the market bottom and start a rally here because choppy market conditions make for difficult trading unless you trade options and focus on Theta (time decay). What happens next to the stock market has a lot to do with the US dollar.
Dollar Index 4 Hour Candle Stick Chart
If you take a look at the dollar index you can see there is a large pennant/base forming. If the dollar breaks out and rallies through those resistance levels then I would expect stocks and commodities to continue selling off and then eventually forming a choppy consolidation pattern which will be tougher to trade. If resistance can hold then we are at the beginning of another move higher for stocks and commodities as a falling dollar is good for the market.
Silver and Gold 4 Hour Candle Stick Charts
Both silver and gold have been moving with bearish price and volume patterns since the May selloff. If we see the US Dollar breakout and rally then I figure silver and gold will quickly move lower as stated on the charts.
Weekend Market Wrap-Up:
In short, the market has been trying its hardest to shake traders out of positions. I also feel that the market is also trying to wear us out by taking up so much time before bottoming.
A lot of traders are getting frustrated with the recent choppy intraday price movements and I will admit I’m starting to get really tired of possible setups vanishing hours later because sellers step back into the market. But there is not much we can do at this point but continue to wait for the market to tip its hand giving us an edge for the next major move.
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Since the first trading session in May we have seen the stock market sell off. The old saying “sell in May and go away” was dead on again this year. Here we are 7 weeks later with the stock market continuing to lose ground. This extended sell off has everyone all worked up that this is the beginning of another market collapse.
Let’s take a quick look at the SP500 hourly chart covering the month of June.
As you can see, price is still falling but every couple of trading sessions we get some big money players nibbling on stocks accumulating shares and running the market higher. This type of price action is typically an early signal that the market is trying to bottom.
There are two key ingredients for a higher stock market and both have been missing from the mix for a couple months. The two key sectors which have a significant weighting in terms of the broader market are the financial and technology stocks.
Let’s take a look at the financial sector:
As you can see on the bottom of this chart, financials started to lag the market in late January. Ever since then this sector has been in a strong downtrend pulling the broad market averages lower with it. The good news is that this sector has just reached a major support zone and is looking ripe for a bounce and possible rally.
The other main ingredient to a higher stock market is the technology sector.
Looking at the technology sector:
Here we can see technology stocks have been pulling back for several weeks. Tech stocks are now trading down at a major support zone and they look oversold. A bounce from this level is very likely in the coming week.
Weekend Trading Conclusion:
In short, I continue to feel the market is trying to bottom here and we are at the tipping point when things get volatile and choppy just before we get a trend reversal in the S&P 500. Keep an eye on the short term charts of financials and technology sectors. Once they start making higher highs and higher lows on the 60 minute charts I believe it will be the start of a nice bounce and possible rally.
The coming summer should be exciting for traders! While summer trading generally tends to be slow, this one could be different. A large number of other professional traders I talk with are all feeling the tension building in the market. We all think some big movements are just around the corner and the big question is which way are things going to move?
Depending on your trading style you may be viewing the recent market action as the beginning stages of a bear market (major sell off). A bear market is not necessarily impossible as the U.S. Economy is showing the beginning signs of weakness. The fact that stocks have moved lower for almost 6 weeks straight is a recent reminder that we may not be out of the woods just yet. The recent price action and negative sentiment has been harsh enough to make 99% of traders bearish.
In contrast, some traders may be seeing this market as an oversold dip preparing for a bounce/rally in the bull market which we have been in since 2009. Some traders may see this as a buying opportunity because you are a contrarian. Most contrarians generally want to do the opposite of the masses (herd) who are merely trading purely out of emotional sentiment.
I myself have mixed thoughts on the market at this point in time. I’m not a big picture (long trend forecasting) kind of guy but my trading partner David Banister is great at it. Rather I am a shorter term trader catching extreme sentiment shifts in the market with trades lasting 3-60 days in length. So looking forward 2-5 days I feel as though stocks and commodities are going to bottom and start to head higher for a 2-6% bounce. At that point we need to regroup and analyze how the market got there… Was the buying coming from the herd, institutions, or was it just a short covering rally? Additionally, where are the key resistance levels and did we break through any?
During extreme sentiment shifts in the market we tend to see investments fall out of sync with each other for a few days. I feel the attention will be on stocks and we get a bounce this week. I am expecting commodities to trade relatively flat during the same time period.
OK let’s take a quick look at the charts…
Dollar Index 4 Hour Candles
I feel as though the US Dollar is trying to bottom. It is very possible that we test the May low at which point I would expect another strong bounce and possible multi-month rally. So if the dollar drops to the May lows then we should see higher stocks and commodities, but once the dollar firms up and heads higher it will be game over for risk assets.
Crude Oil Chart – Daily
Oil took a swan dive in early May and has yet to show any signs of moving higher. Actually crude oil is looking more and more bearish as time goes by.
Silver 4 Hour Chart
Silver has formed much of the same pattern that oil has. On a technical basis its pointing to sharply lower prices still. The fact that silver bullion went from an investment to a speculative trading instrument within the past 8 months makes me think it could test the $25 area. The one thing to remember here is that silver is still overall in a bull market. This is a 50/50 guess in my opinion as it nears the apex of this pennant pattern.
Gold 4 Hour Chart
Gold has held up much better than other metals and commodities and I feel that is because it’s still seen at the REAL safe haven. But reviewing the chart Im starting to see bearish price action beginning to take place.
SP500 Futures – 10 Minute Chart Going Back 8 Days
Last week the SP500 continued to show signs of weakness. Any bounce in the market was on light volume and that is because the sellers took a break and let all the small traders buy the market back up. But once the market moved up enough then sellers jumped back in and unloaded their shares.
Last Thursday I sent out an update to members pointing out that lower prices were to be expected. I came to this conclusion because of many data points. Looking at the chart you can see sellers are clearly in control. The SP500 bounces high enough that it reached a key resistance levels going back 5 days. Also the 200 period moving average was at that level. To top that off my sentiment reading for the herd mentality was at a point which sellers like to start dumping their shares again.
Weekly Market Trading Conclusion:
In short, I am getting more bullish for a bounce as the market falls. But once we are into day 3 or 4 of a bounce we must be ready to take profits and/or look for a possible short setup.
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During the past 4 months we have seen the financial sector (banks) under selling pressure. With real estate prices continuing to fall and foreclosures picking up speed again investors have not been that interested in holding bank stocks. And we all know that without the financial sector moving higher we cannot expect the broad market to make any significant moves higher either.
If you take a look at the financial sector ETF XLF you will notice that it’s now trading near a major support level (fair value) where most shares changed hands in the past. With this sector sliding 13% from the highs in February and the fact that it’s making a parabolic drop into a support zone I can’t help but think a bounce is very likely to form soon.
XLF Financial Sector ETF – Daily Chart
SP500 Futures – 10 Minute Chart
With the financial sector nearing major support and the SP500 staring to show signs of a bottom forming I will admit my heart is starting to pound in excitement for an entry point. I am really hoping that this week we see another sharp drop in the stocks which should spikes the volatility index up (VIX) to 21 or higher. If we can see this take place, then I will be taking a long position to catch a 2-15 days bounce in the broad market.
The chart of the past 10 trading sessions below shows a price and volume pattern which typically leads market bottoms. I’m keeping a close on things these days…
Silver 2 Hour Chart
Silver took a big hair cut last month falling from $50 down to $33 per ounce. Ever since then it has been trying to form a base which will act as the next launch pad for higher prices. So far it is looking good but there is a key resistance level to breakthrough before fireworks. Keep your eye on the silver bullet.
Gold 2 Hour Chart
Gold is back trading up near its high but is starting to struggle with resistance (sellers). We could easily see gold pullback to the $1520 area before taking another run at resistance.
Mid-Week Update Conclusion:
In short, I feel investors are getting very nervous because of the 6 week sell off in stocks. There have been some technical support levels broken on the SP500 and other indexes and its these broken levels which have investors running for the door. The thing is, this type of selling happens every year and generally 2 -3 times. During a bull market I like to see fear in the eyes of investors. Until we are proven wrong about buying extreme oversold dips, they continue to be my focus.
Also if the financial sector can find a bottom and start to rally, then we will see higher stock prices across the board in the coming weeks. I am currently neutral on metals, oil and the dollar. But am getting bullish on financials and the SP500 as they move lower.
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It was a crazy session as the stock market slid over 2% on heavy volume. This type of price action means fear has taken control of masses and they are unloading (selling their stocks) in anticipation of much lower prices.
Trading off extreme levels of fear can be very rewarding if done right. That’s because fear is the most powerful reaction we as humans have and it’s somewhat predictable. Fear can make people do crazy and or stupid things and it’s these extreme reaction which investors do in the market that lead to great trading opportunities. Buying into fear and selling into greed is what I focus on.
Gold and Silver Showing Greed and Fear
For example, if we take a look at the 4 hour chart of gold and silver you will see how investments which have a large amount of speculation like Silver move the opposite to what other related investments like gold are doing.
The first chart which is gold, shows how today’s fear had investors moving into this shiny safe haven. Silver on the other hand has been the investment of choice for every Tom, Dick and Harry trying to play the popular headline investment. So on a day like today when prices start to slide in the stock market these speculative holders of silver get scared and dump (sell) their position in stocks and silver. The problem with silver is that the market is still small and its does not take many people hitting the sell button to send it 5% lower which is what took place today. This is one sign which is telling me traders are getting scared of a market selloff.
Evidence #2 Showing Signs Of Fear
These data points below clearly show sellers were in control today. I like to look at the NYSE because it holds all the big brand name stocks which the masses like to buy when they feel lucky. So when I see this many traders selling and so few buying I know the masses are dumping shares and going to a cash.
The NASDAQ had 10 shares being sold to every one share being bought which is half the fear level of what the NYSE and that makes good sense. The NASDAQ has many smaller companies which the masses just don’t know about or own so there was not as much selling taking place on that exchange. So brand name stocks getting dumped all at once is another sign of extreme fear hitting the market.
Evidence #3 Showing Signs Of Fear
This chart below provides the momentum of the market. I think of it as the rubber band effect. If the market selling momentum is strong enough then it pulls this indicator down to a level which it cannot go much further before it gives way and moves back a neutral or positive extreme level. This little hidden gem of an indicator can help time entry and exit points with ease once you understand it. Currently its telling us that a pause or bounce is likely to happen tomorrow.
Evidence #4 Showing Signs of Fear and an Oversold Market Condition
Take a look at the 10 minute SPY (SP500) chart below. Simple visual analysis shows that today’s strong selling which has brought the market down into a support zone should provide a pause or a bounce very soon. The question is how big will the bounce or rally be?
Given all the confirming is looking ready for a bounce and I feel we could be nearing not a bounce but an intermediate bottom and higher prices going forward. But if we break strongly below this support level then all bets are off and much lower prices should occur.
Mid-Week Trading Conclusion:
In short, today’s sharp move lower has put the market in a short term oversold condition. Meaning, a bounce is very likely to take place within the next 1-3 sessions. With the masses selling all their positions in stocks and commodities it generally takes 1-3 days after a day like this for the selling pressure to dissipate and for value buyers to step back into the market providing support.
I think both stocks and commodities will strengthen in the next few days and we will see if the market can get some traction and start a new rally. But until everyone has sold out of the market giving their shares to the big money (smart money) at a sharp discount I feel we have a rough road ahead.
Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals.
Today on Jim Puplava’s Financial Sense Newshour metals update, David Morgan talks about the 16:1 gold to silver ratio fallacy and why we see silver margin requirements imposed.
Chris Vermeulen is Founder of the popular trading site GoldAndOilGuy.com. There he shares his highly successful, low-risk trading method. Since 2001 Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets. Subscribers to his service depend on Chris’ uniquely consistent investment opportunities that carry exceptionally low risk and high return.
Jim Puplava welcomes Chris Vermeulen today on the Financial Sense Newshour metals update. Chris indicates that silver is still consolidating, with the possibility of one more down draft.
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The price action in precious metals and oil this past week has been breathtaking. The last time we have seen this much volatility in commodity prices was amidst the financial crisis in 2008 and the early part of 2009. Does this mean we are at the brink and risk assets are going to decline precipitously? Obviously that question cannot be answered with any certainty, but the underlying price action in the S&P 500 has been relatively strong compared to gold, silver, and oil.
Talking heads everywhere are predicting the commodity bubble has burst and pointing fingers at excessive speculation in silver and oil. Margin requirement changes in silver futures have been fingered as the primary catalyst for the nasty sell off. Silver had gotten way ahead of itself in terms of price and parabolic moves higher are usually followed by parabolic moves lower. For silver buyers on Friday, April 29 a painful lesson has been learned as their investment has declined more than 30% in 5 days.
It doesn’t take a genius to realize that we are going to bounce higher at some point. With a sell off of this magnitude it would not be shocking to see at least a 50% retracement of the entire move in coming weeks. It is also possible that this is a buying opportunity for precious metals and oil. It is too early to be certain, but a bounce next week is likely as silver went from being severely overbought to severely oversold on the daily chart in one week. The chart below illustrates the 50% retracement and the RSI reading for silver futures:
In the month of April OptionsTradingSignals members were able to capitalize on rising silver prices to close a trade that produced an 18% return in less than 5 days using a double calendar spread in order to produce outsized profits based on maximum risk. Members regularly receive trade alerts focusing on gold and silver using ETF’s GLD & SLV which have extremely liquid options.
While silver prices have been absolutely crushed, gold prices have held up a bit better. In fact, in this selloff gold has been less volatile in terms of intraday percentage price movement and has not suffered from near the losses that we have witnessed in silver. The gold futures chart below illustrates key price levels:
Members of the OTS service received a trade alert on April 6th for a calendar spread that was converted to a vertical spread. When the vertical spread was closed on April 26th the members realized a gain close to 56% based on the maximum risk of the trade.
Recently we have received some poor economic data which has put a drag on equities the past few weeks. This morning we are seeing a strong bounce in the S&P 500 futures and if we have another light volume Friday prices tend to drift higher throughout the trading day. The S&P 500 futures spiked to around 1,370 on the news of Osama Bin Laden’s death and then sold off from that point. The chart below illustrates the S&P 500 futures rally and subsequent sell off highlighting current key price levels:
Members of OptionsTradingSignals received a trade alert on April 12th to put on a call vertical spread to capitalize on rising prices. On April 21st partial profits were taken and eventually stop orders closed out the position on May 4th locking in a total gain of around 32% for the trade based on maximum risk.
Oil prices have sold off sharply, albeit not as sharp as the downside move in silver recently from a percentage standpoint, but a significant amount of the risk premium has come out of oil prices. I continue to believe that oil prices over the long term have only one direction to go based on tightening supply / demand going forward and lower production levels in the future. Similar to silver, a .500 retracement of the entire recent move is rather likely in coming weeks. The daily chart below illustrates key price levels in oil futures:
I continue to believe that oil prices are going to work higher over the longer term for a variety of reasons, but a drop in gasoline prices would not hurt U.S. Consumers and the domestic economy. Higher oil and gasoline prices weigh on the U.S. Economy heavily so this sudden decline in price is beneficial to most Americans which could juice consumption if prices stay lower for a longer period of time.
Overall, price action in the commodity space has been extremely volatile the past week with silver and oil really getting hammered lower. Gold and the S&P 500 held up a bit better and it would not be shocking to see the S&P 500 put on a rally from here if oil prices stabilize. However, if the U.S. Dollar continues its recent rally it will force the commodity space as well as equities lower. The daily chart of the U.S. Dollar Index futures is shown below:
In closing, I am expecting a bounce in coming days and a .382 or .500 retracement of the entire move in gold, silver, and oil would make sense so I would not be too aggressive shorting. However, I would not necessarily be an aggressive buyer either. It is going to take time for market participants to digest the recent moves. In weeks ahead it will be more apparent what price action is likely to do and I would be shocked if we did not see a few low risk, high probability trades setting up.
Speaking of low risk, high probability trades, the month of April was the best performance for the OptionsTradingSignals service so far year to date. Seven total trades were opened and six trades have been closed with sizable profits. Recent returns included an 18% return in SLV, a 56% return on a GLD trade, 32% return on an SPY call vertical spread, a 12% return on a RUT Calendar spread, and a 37% return on an AMZN calendar spread. The total cumulative return in April was 155%.
Assuming a trader had a $10,000 account and risked a maximum of $1,000 per trade, the gross gains would have been well over $1,400 in April alone. The overall service is up over 15% year to date handily beating the S&P 500 return while assuming less risk. Take advantage of the special offer going on now where new members get 3 months for the price of one!
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The past few weeks we have been seeing the US Dollar slide to new lows at an increasing rate. The strong devaluation of the dollar has sent precious metals like silver and gold rocketing higher out of control sending them parabolic!
During the past 6 weeks both silver and gold have been rising in a parabolic formation. Meaning the price is going straight up with strong volume as everyone gets greedy and buys into the commodities at the same time. Most of you who follow my work already know that if the general public is piling into an investment rocketing prices higher, you better start focusing on tightening your protective stops and or taking some profits off the table before the price collapses.
Take a look at the weekly chart of Silver below:
Silver was grinding its way higher from July into March of this year. Only in the past 6-7 weeks did we start to see silver open up and run with expanding candles growing at an accelerated rate. This virtually straight up rally is a signature pattern and tells me that price action is now VERY unpredictable and anyone getting involved should be tightening their stops and or taking partial profits on price surges.
Parabolic moves can provide some big gains but most traders end of giving it all back and then some because the price can drop very abruptly as seen on this chart.
The weekly chart of gold below shows much of the same thing but without the extreme volatility that silver has.
Now, if you take a look at the US Dollar chart it’s starting to look very bullish in my opinion. The chart shows a falling wedge which typically means the selling pressure should be coming to an end soon. I’m not sure how large the bounce/rally will be. I do think a quick move to the 75 level is very likely in the near future though.
I find that metals tend to turn just before the dollar does. So I’m very cautious here on buying any stocks or commodities at the moment. The past 2 years we have seen stocks and commodities have an inverse relationship with the dollar so a rising dollar means a market pullback will take place. Sell in May and Go Away…?
Mid-Week Trading Conclusion:
In short, we exited our SP500 position this week for a nice 6% gain in a couple weeks making that our third profitable back to back index play. At this time I’m not ready to buy or short the market until all the charts line up for another low risk entry point. Things are 50/50 odds here and that’s not good enough for me.
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