Dec 6th, 2009
The first half of last week started out strong with stock and precious metal ETFs moving higher. The week ended with less certainty of direction. The energy sector underperformed the market with crude oil and natural gas moving lower.
Below are some ETF charts showing where the broad market and commodities are trading with some analysis showing what could transpire going into the year end holiday season.
DIA ETF – Daily Trading Chart
The DIA ETF that I am using to represent the Dow Industrial Average looks to be over bought and ready for a pullback. The broadening formation indicates volatility is rising and that the bulls are losing control. This pattern occurs in all time frames and in stocks, commodities and exchange traded funds. Remember this pattern when looking at charts as it could save you some money.
Using simple analysis we can see where the Dow is likely to test. With any luck this could happen quickly and be followed by a nice low volume rally going into to the holiday.
GLD Gold Exchange Traded Fund – Daily & Weekly Charts
Gold had a huge rally the first half of the week but gave it all back and then some on Friday. I have been warning about this sharp profit taking correction for a few days making sure everyone had tightened their stops or started to trim their positions. We locked in a nice 11.9% gain on Friday as our stop for GLD was triggered.
GLD fund is likely to trade in one of two scenarios this week:
1. Move side-ways after last week’s sell off
2. Or continue moving down as investors and short term traders review Friday’s action and place their sell orders for Monday.
Take a look at the small weekly chart which is located within the daily chart below. We had a very big volume week and a reversal candle indicating a shift in momentum. If we are lucky this could be a quick pause before another move up, but I am thinking gold will need several weeks to gain its footing. Only time will tell, and either way we will be ready.
SLV Fund – Daily & Weekly Charts
Silver had a sharp pullback with gold on Friday but because silver did not have investors tripping over each other trying to buy it like gold, the sell off was much more controlled. Silver breached the lower trend channel line but closed back above it to end the week.
Silver is trading at the lower level of its trend channel and at a support level. There is a good change it will bounce Monday or Tuesday. But until we see what gold is doing at the open Monday morning I would not be jumping into anything at this point.
The weekly chart shows a reversal candle signaling strong selling pressure and this is the reason I would not be buying here. Let’s watch for a few days and see what happens.
USO Oil Fund – Weekly Charts
Crude oil has been weak the past 2 months as it drifts sideways from the October breakout. Not much to say here other than let’s wait for some action and a low risk setup.
UNG Natural Gas Fund – 60 Minute and Weekly Chart
This year I think natural gas has taken more money from traders than any other fund. Virtually everyone has been burned by this extremely over sold commodity. The 60 minute chart shows three resistance levels. But if you combine all of them there is significant resistance from $8.80 – $9.25. That is the test of the August lows.
We reached the August lows and that is what triggered the bounce and short covering rally 2 weeks ago. We have now seen prices slip below that level on rising volume which is bearish. With prices below this major resistance level I think we will see sellers step in on each bounce to push prices back down.
Stocks and Commodity ETF Trading Conclusion:
The broad stock market looks ready for a small correction. That being said the tape does not lie and we continue to see money flow into stocks which is why the dow, sp500 and Russell 2000 are holding up well. These crossed signals are the reason money/position management is so important for traders. Scaling in and out of positions during oversold and overbought conditions is crucial for pulling money out of the market consistently.
I do this by tightening my stop to lock in a gain on 25-50% of my position, while holding a core position in the event prices continue to rise. This way I make a premium on part of my trade and have my stop moved to break even or higher for the core position allowing it some wiggle room as prices consolidate before the next leg higher.
Gold and silver could go either way quickly this week. We have locked in some good money last week and now we hold our core position. From here I expect the gold and silver to play out in one of three ways:
1. Prices continue higher and we ride our core positions for larger gains.
2. Price continues to correct and we get another low risk entry point to add to our core position, then prices rally.
3. Or, precious metals have a melt down and we take a small 5% gain on our core position.
Crude Oil and Natural Gas are not tradable at this time. We need to see more price action before a high probability setup will develop. Let’s watch and wait these out some more.
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