Are You Positioned to Profit?
What a trading session Wednesday was with the FOMC meeting and the FED coming out leaving the Fed Funds Rate unchanged at 0.25% and saying the economy is looking weak and will not likely to get better any time soon. This wave of negative news triggered a selling spree across the board in stocks, metals, and oil. On the flip side all that money being pulled out of those investments was being dumped into bonds and the dollar currency.
So the question everyone is asking is why almost every asset class sold off after the Federal Reserve’s statement today? The next question is how do we position ourselves to profit?
Understanding how the market moves is not a simple task, if it was that easy everyone would be pulling money out of the market on a daily or monthly basis. With that being said, moves can be anticipated if enough indicators are pointing to the same outcome.
Gold, SP500 and Oil 10 Minute Charts Showing Todays 2:15 FED News
Over the past few weeks we have been seeing stocks, oil, and gold turn bearish with similar price and volume action. Having three major investment vehicles hinting towards a move in the same direction as each other increases the odds for that move to occur. With the Fed coming out with negative news and no quantitative easing on tap, a rally in the dollar was triggered because inflation (printing of money) is not in the picture for some time still.
Bonds and Dollar Index 10 Minute Charts Showing Today’s 2:15 FED News
Now if we look at the safe havens we can see the positive side to today’s news.
Bonds have been trading higher for some time and the key in trading is to trade with the trend. Though it’s easier said than done… In this morning’s pre-market analysis I talked about bond prices and how they are looking toppy but we need one more large surge higher before I will consider looking for a short trade setup. Today’s news sent bonds surging higher which I feel will happen for a few more days. Once the momentum stalls out of bonds, then I may be looking to short bonds using the TBT inverse bond fund.
The fact that there is no quantitative easing planned is bullish for the dollar. Stepping back a few weeks we have seen the dollar index rally very strongly. The move up was an impulse wave meaning a trend reversal from the multi-month down trend. Knowing that the dollar had shifted from a down trend to a strong uptrend prior to the Fed’s announcement today was our tip off to being long the dollar several days ago at a much lower price level.
Mid-Week Market Trend Conclusion:
In short, I feel the intermediate trend (5-20 days) remains firmly down for stocks and crude oil. Silver is more of a wild card because it is more of an industrial metal/speculative investment and it can move at times with gold or down with stocks…
Looking at gold. I am bullish on gold long term but at this time I remain neutral until I see how the next couple trading sessions play out.
Bonds I remain neutral because they have moved a long way without any substantial pause or pullback and I feel one really positive headline news item could send bonds sharply lower.
The dollar index shifted from a strong down trend to a very strong up trend last month and I feel we could see another substantial rally unfold. I have an 80.00 – 81.00 price target on the dollar index at this time.
Consider joining me at TheGoldAndOilGuy for ETF trade ideas on the SP500, Oil, Gold, and Silver with great accuracy. Check it out at http://www.thegoldandoilguy.com/free-preview.php
Chris Vermeulen
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!
It has been a very interesting week thus far. Monday kick started traders with a heart pounding equities sell off which sent money into the US Dollar, precious metals and bonds as the safe havens of choice.
A lot has happened this week on a technical analysis basis which I can’t really show in a written report like this. But can do so in detail within my video newsletter. There are just to many charts required and layers of analysis to cover… But I can cover some of the points and my thoughts using the charts below:
SPY 30 Minute Intraday Chart
This chart shows the volume traded at various price levels for the SP500 index. These high volume levels act as support or resistance depending if you are above or below them. On Wednesday we had large gap higher into a resistance level which the market could not break through. So I am expecting to see the market take a pause and fade back down to fill part or all of Wednesday’s gap window.
While most gaps tend to get filled. Gaps that occur right at the beginning of a new trend when momentum is strong. They generally do not fill all the way down to the bottom. I expect a couple days of sideways to lower price action. Buyers should step back in and send the market higher next week if this trend is to continue.
GDX – Gold Miner Stocks – Daily Chart
Gold stocks have been underperforming the price of gold bullion for several months. This typically is not a strong sign for physical gold prices. That being said I do feel the majority of investors are seeking true safety and want to own real gold and not some highly leveraged gold stock. This to me is more of a risk off trade for global investors and it explains the performance.
From the recent price action shown on the GDX chart I am expecting to see prices trade sideways or lower in the coming days. A sideways move would actually be bullish and would signal a possible breakout to upside. So that is what I am hoping will unfold in the coming days/weeks.
US Dollar Daily Chart
The dollar continues to get sold at a tremendous rate and the Fed is devaluing the currency as quickly as they can trying and save the world one dollar at a time…
The trend is strongly down but it’s starting to near a point where we should start to keep a closer eye on it for signs of a reversal to the upside. When the dollar makes a move higher and starts a rally it will put downward pressure on stocks and commodities. We must be prepared to move our protective stops ups and possibly take advantage of falling prices in the near future. Until then remain long equities and commodities.
Mid-Week Trend Conclusion:
In short, it looks as though stocks and commodities are in favor again. Monday’s panic sell off looks to have shaken the masses out of the market and the big money players were buying up all the shares they could. Members and myself are sitting nicely in our long positions and this could be the start of something exciting.
You can get my Pre-Market Trading Analysis Videos, Intraday Chart Updates and Trade Alerts with my Premium Newsletter: http://www.thegoldandoilguy.com/free-preview.php
Chris Vermeulen
I was starting to put on my bullish hat on Friday morning when out of the blue an ugly close has forced me to rethink my position. After viewing a few hundred charts, I have determined that while I am still leaning into higher prices at this point in time, I will not totally rule out a rollover on the S&P 500. In coming days the news flow will be extreme and headline risk will be everywhere we look. The S&P 500 has been able to deflect worry for quite some time now and in every case the resiliency is unquestionable.
However, we are nearing the beginning of another earnings season which will start in just a few weeks’ time. First quarter earnings for 2011 are going to be quite interesting and most analysts’ estimates are relatively challenging. Will the rubber hit the road into earnings? Are we about to see a double top play out into earnings, or is there going to be a breakout which will take us to the SPX 1,400 – 1,415 price level?
I know, I ask a lot of questions but quite frankly that is what is running through my head. The SPX is not out of the woods yet, and the price action on Friday indicated that there is some serious supply overhead and two key resistance levels to break through before the SPX gets back to clear blue skies overhead. That being said Chris Vermeulen has caught a nice part of the recent bounce with his subscribers. He does feel the market is about to get choppy but his analysis is pointing to overall higher prices in the coming weeks.
SPX illustrates the two key price levels:
In addition to the uncertainty that earnings season can bring, the primary reason why I am still leaning into a bullish move in the S&P 500 is the recent price action in the U.S. Dollar Index futures. The U.S. Dollar is scheduled to make its 3 year cycle low sometime this spring and the recent price action is indicative that the recent lows may not be the cycle lows. If the U.S. Dollar Index breaks down below recent lows, I would expect to see a nasty sell off.
The U.S. Dollar Index futures daily chart is shown below:
Whether readers believe that we are going to be in an inflationary environment or a deflationary environment is a topic for a different time, but the chart above is undeniable that recently the U.S. Dollar has declined in value and is exhibiting weak price action. Friday morning it looked as though the U.S. Dollar was going to rip higher, but by the end of the day sellers had stepped in and forced the U.S. Dollar into the red for the session. The price action on Friday highlighted the weakness in the U.S. Dollar and the high levels of overhead supply.
If the U.S. Dollar continues to weaken, in the short run I would view this as a positive for the S&P 500, crude oil, and precious metals. If the dollar breaks down to new lows, it should help buoy the S&P 500 and gold prices. Gold has been consolidating for nearly 6 months and a breakout higher from current price levels would make a trip to $1,500 an ounce very likely. I would not be surprised to see gold work even higher than $1,500 an ounce depending on how violent the selloff in the U.S. Dollar might be.
The weekly chart of gold futures is listed below:
I would think that most investors are aware that crude oil futures have been trading higher recently. On Friday oil prices climbed above recent resistance around the $107/barrel price level and reached new recent highs. Members that belong to my paid service enjoyed a relatively low risk options trade that we put on several weeks ago which involved selling cash secured naked puts on $USO. The trade was closed on Friday for a total gain of 85% of the premium that was sold. For long time readers, my stance on energy has been pretty obvious. In the longer term, energy prices almost have to go up as the world’s demand for energy increases while supplies remain flat.
I will likely get involved in another oil trade at some point in the future, but for right now I’m going to wait for a more prudent entry. Based on current price action, it would not surprise me to see crude oil futures test the $110 – $112 per barrel price range in the near future. If the $112/barrel price level is breached to the upside, a test of the $120/barrel price level will be likely.
The weekly chart of oil futures is listed below:
Weekend Trend Conclusion:
The S&P 500 is in an interesting place as far as the price action is concerned. With earnings season rapidly approaching and a possible break down in the U.S. Dollar Index likely, future price action is uncertain. I am leaning into the bullish camp at this point, but that could change rather quickly based on the price action later this week in both the S&P 500 and the U.S. Dollar Index. One thing worth mentioning is that if the U.S. Dollar Index were to bottom around these levels and a bounce higher transpired, it would put negative price pressure on most asset classes. The fact that price action in the U.S. Dollar Index has been weak lately makes me believe a break down is likely, but as most readers know Mr. Market offers few guarantees.
Assuming the U.S. Dollar breaks down, we should see the S&P 500, precious metals, and oil continue to work higher. My eyes are going to be watching the U.S. Dollar Index closely in coming days/weeks. If a breakdown transpires, the potential upside in precious metals and oil could be intense. Ultimately, I remain slightly bullish on stocks and extremely bullish on oil and precious metals. However, my entire thesis could change if the U.S. Dollar Index starts to firm up and begins to work higher. There are simply too many question marks surrounding price action to take on significant amounts of risk at this point in time.
Analysis & Opinions of:
Chris Vermeulen – www.TheGoldAndOilGuy.com
Equities and Precious Metals are on the edge of another rally and it could start as early as tomorrow.
On March 13th I posted some of my analysis online showing how the market was trading at a key pivot point and that a sharp price movement was about to unfold. I also provided everyone with the direction in favor which played out perfectly catching a 4.5% in three days.
As of today we are getting the same setup I saw on March 13th, but this time it’s pointing to higher prices. Take a quick look at the charts I was looking at for both the SP500 and gold and you will notice that the SP500 and gold both moved to the support levels before starting to bounce: http://www.thegoldandoilguy.com/articles/it%E2%80%99s-do-or-die-week-for-equities-and-gold/
While we caught the move down on the SP500 playing the SDS Double leveraged inverse fund we did not take part in falling gold prices. Reason being, there is so much fear in the market and the amount of surprise news popping up each week I don’t think shorting precious metals is a safe call. Rather I am looking for a pullback to cleanse the holders of the commodity then I will buy once price confirms the continuation pattern has completed.
Now, stepping forward to this week’s price action
SPY Daily Chart
We can see in the chart below that price is currently testing a key resistance level. Before the week is over we could see some big price movement equities. I need to see what happens tomorrow but I have a feeling we could see a breakout to the upside for a long position.
Gold Miners Fund Daily Chart
Gold stocks have be under performing the price of bullion for a few months but it looks as though they could be starting a sizable rally. If gold stocks continue to move sharply higher out of this pattern, then it’s a positive sign that gold and silver bullion will both continue to move up.
Gold Daily Chart
Gold is testing a key resistance level and if it breaks above this pattern then expect much higher prices. I can see GLD moving up $5 from this level and gold futures moving up $60 per ounce fairly quickly.
Mid-Week Trend Report:
In short, stocks and commodities may have shaken the weak positions out of the market during the recent pullback in price. Things could be ready to start another multi month rally and trade setups. Keep your eyes on the charts…
Get these reports sent to your inbox each Sunday & Wednesday: http://www.thegoldandoilguy.com/trade-money-emotions.php
Chris Vermeulen
Many readers might remember that exactly two years ago the S&P 500 tagged the infamous 666 price level before putting on a monster 2 year rally that saw it surge over 100% to the February 2011 highs. Investors today are staring at a rising wall of risk while corporate credit spreads remain bullish, corporations have been able to expand margins and produce increasing profits, and Federal Reserve Chairman Ben Bernanke has declared that there are no inflationary concerns. Quite frankly I am going to leave Ben Bernanke alone simply because so many other people will do a better job of declaring him incompetent and the creator of massive bubbles in risk assets, but I digress.
Right now investors have to weigh rising oil prices, geopolitical conflict in the Middle East, the threat of higher interest rates and inflation against the bullish backdrop discussed above. The price action in the broader market place is talking, but we have to listen with an open mind currently. There are two key price levels that are obvious when we look at a daily chart of SPX. First of all, the SPX 1331-1332 price level is acting as major resistance and holding the bulls in check. Should this level be breached to the upside on a daily close, we could see prices extend higher to test recent highs. The chart below illustrates the key upside level around 1331-1332.
However, it is important to note the bearish wedge forming on the SPX daily chart. If price can push below the recent lows around 1294, we should see an extension lower to the 1260-1280 area before support comes back into focus. If we were to test the 1260-1280 price level, it is hard to say where price action could go. We could see an extension higher which pushes to higher highs or we could rollover and test the 1250 price level below. I will wait until we get confirmation in either direction before making any major assessment, but for right now those are the key levels for traders to watch. The chart below illustrates the bearish wedge located on the SPX daily chart.
My bias remains to the downside due to what I am seeing in the Volatility Index (VIX) and what I refer to as the “usual suspects”. The usual suspects include small caps represented by IWM, transports represented by IYT, and the financials represented by XLF/KBX. I look at all of these metrics daily in order to facilitate my view of the marketplace and where I expect price action to be headed. Of course I take into consideration other analysis metrics such as market internals and chart formations, but the crux of my daily analysis is derived from the analysis of the VIX and the suspects.
Take for example the Volatility Index (VIX) daily chart and it is obviously trending higher and is well above key moving averages. I believe that in the future we will see the VIX test the 200 period moving average and potentially breakout. The test I am sure about, the breakout remains to be seen. The key levels on the VIX are shown below:
IWM has a similar trading pattern as the S&P 500 index but at current price levels it is well off of the recent highs. It is also building a bearish wedge and I will be watching it closely to see which way it breaks. If IWM breaks down ahead of the SPX it is likely that the SPX will follow suit. The transports (IYT) have gotten banged up the worst as the rise in oil price negatively impacts the entire sector. Transports are also trading well below recent highs and also have a bearish wedge formed on the daily chart.
The financials (XLF/BKX) exhibit a bearish wedge but they also have head and shoulders patterns forming on their daily charts. Should price break the neckline we could see heavy selling pressure set in on the financial complex. Most regular readers know that I put a lot of emphasis on the price action in the financials (XLF) and as such should they breakdown the broader indices will move in tandem. The daily chart of XLF is listed below:
Interestingly enough the U.S. Dollar Index futures appear to have formed a short/long term bottom on the daily chart. It is obviously unknown whether this is just a bounce to work off oversold conditions or the beginning of a longer term move higher. The primary point for traders to consider is that a rising dollar could place additional selling pressure on the S&P 500, crude oil, and precious metals.
By now I’m guessing most readers are starting to get the theme here. We have bearish wedges forming on key indices, however that does not mean that they will follow through to the downside. We could see a failure and a breakout higher just as easily as a bearish breakdown, thus the reason why the key levels are so important on the S&P 500. I am going to wait for a clear breakout/breakdown and will accept directional risk on the broad indices at that point. Until then, I am not going to get involved in the daily chop.
Get My Trade Ideas Here: www.optionstradingsignals.com/profitable-options-solutions.php
JW Jones
“I love the smell of napalm in the morning” Lt Col Bill Kilgore, Apocalypse Now
One of the opportunities available to the knowledgeable options trader is the ability to capitalize on major price movements while maintaining an acceptable risk profile. These opportunities are particularly attractive when they occur late in the options cycle because of the rapidly accelerating decay of the time premium of options. In appropriately structured positions, this time decay can be a wind at your back as the time premium relentlessly goes to zero at the closing bell on options expiration Friday.
Let us consider the recent opportunity presented during the current options expiration week by NFLX. As an aside, for those of you who have read my columns before, remember that we recently discussed an earnings trade on this underlying. Lest you think my screen is stuck on this underlying, remember that not all vehicles exhibit adequate liquidity for options trading.
NFLX is a prime example of such a stock with huge Open Interest (OI), tight bid/ask spreads, and tremendous daily volume. These are the types of vehicles that work best for option trading. Beware of options with little liquidity, they can lead to “Hotel California” syndrome; you can check in but you can’t check out.
But I digress; let’s return to the situation in NFLX. This past Monday, the beginning of the February options expiration week, NFLX gapped up and reached an intraday high of $247.55, a price which represented an all time historic high for this stock. The chart is displayed below:
As is always the case in options trades, it is important to consider the reaction of the implied volatility to this price spike. As shown in the chart below, the rapid price rise resulted in a volatility spike. The at-the-money options went from an implied volatility (IV) of 34% at market close Friday to an IV of 44% at market close Monday. As another aside, many option traders consider that IV is inversely correlated to price. This current reaction demonstrates the more accurate view that IV is more closely correlated to the velocity of price change.
These factors together with my prognostication that this spike in price was, at least for the short term, not sustainable led to the initiation of a high probability trade. The structure of the trade was that of a put butterfly constructed with a bearish directional bias. The essence of the trade was twofold:
1. I expected downward movement in the price of NFLX.
2. A dual impact on the time premium sold within the butterfly.
This hypothesized dual impact would be both time decay into expiration and decreases in IV as the unsustainable price velocity slowed. The structure of the trade implemented Monday afternoon and its expected P&L behavior is graphed below:
Pay particular attention to the lowest broken line; this represents the P&L characteristics at the time the trade was initiated. Using the options expiration break even points as stops, the point at which the solid red line crosses the 0 point, a potential risk:reward in excess of 1:7 is possible.
Over the next 2 days of market action, the prediction of a decrease in price came to fruition. At market close Wednesday I removed half of the trade and captured a return of 32.6% on invested capital. The remainder of the trade remains in place and currently shows a profit of around 40% on invested capital.
One of the important functional characteristics of option positions in general is the extreme dynamic nature of their profitability. It is for this reason that it is often wise to remove part of a profitable position in order not to suffer economic loss, and, more importantly, the damage to emotional capital from allowing a winning position turning into a loser.
When considering the dynamic nature of option positions, one of the fastest potential movers is a butterfly at expiration. As the position approaches expiration, the rapid decay of time premium results in extreme sensitivity to price movement. Butterflies turn from gentle creatures lazily flapping their wings in the breeze to man eating dragons as expiration approaches. Be prepared to slay the dragon before he can take your hard earned profits.
Get My Trade Ideas Here: www.optionstradingsignals.com/profitable-options-solutions.php
JW Jones
One of the notes that I keep stuck to my computer reads “remember seasonality”. For those just now becoming familiar with options, you may assume I am reminding myself not to forget deer season or the opening of the season for striper fishing. While these are important dates for many of us to remember, I am reminding myself that there are distinct periods within the options expiration cycle where certain trades work better and give a competitive advantage to the trader who recognizes and takes advantage of this seasonal pattern.
As a quick review, remember that option cycles historically have been established with monthly expiration cycles. For the knowledgeable option trader, different time periods within this monthly cycle are known to have distinct characteristics. The primary reason for these different characteristics is the “non linear” decay of time premium.
This “non linear” behavior simply means that the decay of time premium accelerates as expiration approaches; for us visual thinkers, envision a snowball rolling downhill. The recent arrival of weekly options has opened a whole new concept of seasonality for traders using those vehicles, but that is a discussion for a future time.
The butterfly is one of the option constructions most affected by seasonality. The last two weeks of the monthly option cycle is even called “butterfly season” by many option traders. The classic behavior of butterflies is that they are only slightly impacted by changes in the price of the underlying early in the cycle and exhibit increasing response to price change late in the option cycle. This peculiar functional characteristic has frustrated many traders who have tried to employ butterflies early in the options cycle and have routinely seen the correctly predicted price action result in minimal or no profit in the position.
For those of you unfamiliar with this construction, let’s look at an example. First and foremost, we need to be aware of our position in the cycle. February options expire Friday, February18, this is 17 days from today. That is close enough to the mid point of the cycle to be open season for butterflies.
The essential structure of a butterfly is to establish a spread in either calls or puts that has the structure +1/-2/+1. The spread uses options which all expire in the same month. A variant of the classic butterfly, the iron butterfly, uses both puts and calls but this metallic beast will need to be the subject of another post.
Since a picture is worth “a thousand words”, let’s look at an example of a butterfly structure before we discuss some of the nuances of which the trader must be aware. Now, don’t go out and put this on, it should be used only as an example and not a trade recommendation or financial advice! This trade is to demonstrate the butterfly structure and to lead us to some functional considerations. The trade is that of a put butterfly in SLV.
See the chart and Read more…
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I’ve been forecasting a Mid January top in the SP 500 (Us Markets) for multiple weeks now well in advance. My work had looked for 1285 as a minimal upside rally from the 1173 4th wave lows. The range was 1285-1315, we have been to 1296 but that pretty much should have capped off the rally. Here are some further thoughts:
Copper, Gold, Silver- All topping and rolling over for now. A few weeks ago I began to go bearish on Gold (And with it of course Silver), and the Elliott Wave patterns became very muddy and unclear. This was a warning signal. Also, the inability of Gold to pierce through the 1425-30 highs for a 3rd attempt indicated a triple top failure which I eluded to in an Email bulletin a few weeks back. The Gold, Copper, Silver topping and rollover movements are warning signals to be more cautious. Gold should work down to 1270-1280 eventually, and Silver to 25-26.50 ranges likely.
Small Cap Index- The TZA ETF I suggested on TMTF recently had a huge 2 day reversal rally on Thursday and Friday of this trading week. TZA Closed just over 16 and I see it moving to 19-20. We are long also in my ATP advisory service for insurance and gains potential. The Russell 2000 is rolling over first, which makes sense because the sentiment and strong economic rebound from the summer lows has peaked out. Small Caps are likely to correct the hardest in this wave pattern down, and so we shorted them instead of shorting the large caps or SP 500. To wit, this week the small caps dropped 3.5% and the SP 500 only 0.8%.
IBD 100- The Investors Business Daily top 100 fell 5.4% this week collectively. A quick scan of the charts on those 100 reveals a lot of topping and weakness patterns to me. These would be considered leader small cap and mid cap growth stocks, and suggests further evidence of continuing correction in the markets.
Elliott Wave theory is scoffed at by many investors because they have been led to believe that Robert Prechter is apparently the only person on earth who has a license to use them. I’ll reserve my comments on his abilities, but you can gather that I tend to often disagree with his views and leave it at that. EWT works extremely well in the right hands, and that is why I launched TMTF last year, to share my views and my methods. This has allowed me to confirm summer bottoms at 1040 this year based on the movement from 1120 to 1040 (Which we also forecast). This allowed me to call a top on November 5th at 1225 after going just over my 1220 predictions made weeks in advance. This allowed me to call a bottom 4th wave at 1173-75 and a resulting rally to 1285 in advance. Not to mention April 2010 and January 2010 tops within days. Still think EWT is bunk? Try ignoring those who are biased and trade their biases. I dont trade Gold, Silver, or the SP 500 futures or indexes… that allows me to remain 100% objective and not force wave counts into my personal opinions.
EWT is not perfect, but nor is any forecasting methodology or technical analysis strategy. They all have their flaws. However, I try to blend in a few elements to back up my EW forecasts, so as to eliminate too many mistakes. Sentiment readings for one, and Fibonacci sequences for another.
Bottom line: I continue to be cautious on the markets and believe the SP 500 will drop to 1170-1180 on the LOW END, with 1210-1229 possible as the shallower end of a correction. The Russell 2000 will take the hardest hit, and probably has another 8-9% downside left before a bottom pivot. We remain long TZA to short that index at 3x multiple over at my ATP service. I have not shorted the SP 500 or large Caps on purpose, because I think the best place to short is small caps. I continue to recommend high cash positions for now (Im about 40%) so that you have money to buy into an oversold wave 2 bottom in the markets when it occurs. Gold will continue to correct with a bounce at 1310-1320 areas likely. I see it getting to 1270-1280 though as most likely.
Large Caps are likely to outperform small caps in 2011, as the bulk of the economic trough and rebound have now occurred and been priced in. Gold may struggle for several months but has a shot at hitting $1500-$1515 by years end, but one month at a time. That said, selective stock picking will always have the ability to trounce the index averages, and that is what I do over at ATP (ActiveTradingPartners.com).
Stay tuned.
If you would like to benefit from learning more about my methods, which have been historically accurate, please check us out at www.activetradingpartner.com There is a coupon available if you’d like to subscribe and save $150 just email me at Dave@ActiveTradingPartners.com or you can sign up for free occasional reports.
David Bansiter
Today the stock market bled out with a river of red candles. All of the recent gains vanished in one session. Strong selling volume sessions like this are typically a warning sign that distribution selling is starting to enter the market.
Distribution selling is when the big money players start unloading large positions in anticipation of a market top. They do try to hide it by selling into good news or earnings when the average investors are buying into all the hype of better than expected earnings on the news. As average investors jump into the market because of the good news, this extra liquidity helps the big money players (banks, hedge funds, etc..) sell large amounts of their positions to the eager buyers. This is why the “buy on rumor and sell on the news” saying is kicked around wall street….
To me, panic selling is typically seen as a bullish sign to enter the market simply because if everyone is/has rushed to the door to sell what they own, then really most of the down side risk has been taken out of the market. That being said after an extended multi month rally and higher than selling volume I look at it more like distribution selling and a shift in momentum.
I feel the precious metals sector will be starting something like this in the near futures, and possibly it has already started as seen in the rising volume on the down days.
Let’s take a look at the charts…
AAPL – Apple Stock 10 Minute Chart
Two days ago AAPL shares took big hit because of some medical issues with the CEO, the shares did float back up. But what is important here is the distribution selling which took place after Apple came out with much better than expected earnings. The general public loves to buy good news especially when it’s for a famous company. But large sellers stepped in unloading as much of their position as they could before making it look to obvious.
The average investor listening on the radio or catching snippets on the news do not pick up on these things which is why the big money players can get away with this over and over again.
GS – Goldman Sachs 10 Minute Chart
Goldman came out with average earnings being just above estimates and the share price took a beating with very strong volume.
Distribution selling looks to be entering the market and this is a bearish sign. I would not be surprised if we see the market top out in the next 5-10 trading sessions.
SPY – SP500 10 Minute Chart
Here you can see my green panic selling indicator spiking up much higher than normal dwarfing the past sell off spikes. This makes me think the big money is now starting to unload which will shift the current upward momentum to more of a sideways whipsaw type of price action. Eventually it will roll over and a new down trend will start.
As you can see from this chart the SP500 is trading down at a support level so a bounce is likely going to take place. If in fact today was the first distribution day then the big money should let the price inflate back up to the recent highs and possibly make a new high to help keep investors bullish before the hit their SELL BUTTON again… They like to play these games and understanding them is a key part of trading. Expect choppy price action for a week or two…
Silver Daily Chart – The Next Wave of Selling?
I look at silver and gold as one… so what I show here is the exact same for gold.
As you can see silver is trading under 3 of its key moving averages and todays bounce was sold into after testing the 14 and 20 period moving averages.
Take a looking at the bottom of the chart and you can see distribution selling volume as the spikes are all down days. If silver breaks below the $28 level then we could easily and quickly see the $26 and maybe even the $24 level.
The Mid-Week Market & Metals Trading Conclusion:
In short, the financial power players are pulling out all the tricks to shake traders out of their positions. A lot of people shorted the market in the past 2 weeks only to get hung out to dry and most likely stopped out of their short positions for a loss. Fortunately we did the opposite taking another long position in the SP500 ETFS because my market internal indicators, market breadth and simple trading strategy clearly pointed out that the average investor was trying to pick a top by shorting the market. As we all know, the market is designed to hurt the masses which is why I focus on the underlying trends, price action, volume and market sentiment for timing trend changes.
That being said, I still think the market could grind higher and make another new high. But any rally or new high will most likely get stepped on with heavy selling. Expect strong selling days followed by a couple days of light volume sessions where the price drifts back up into resistance levels. This could take a week or two to unfold so don’t jump the gun and short yet. It’s best to see more distribution selling before picking a top.
If you like this trading reports or if you would like to get my daily pre-market trading videos, intraday charts, updates and trade alerts be sure to join my newsletter: http://www.thegoldandoilguy.com/
Chris Vermeulen
