Are Commodities and the Dow Index Dead?

It was a heart pounding week on Wall Street as traders and investors locked in profits during 2010’s first round of earnings season. While it is normal to see selling of shares after good news hits the market, last weeks melt down was over exaggerated and for good reasons.

In short, we expected good earnings and that is why the markets have been crawling higher the past couple months (buy on rumor, sell on news). But what made last weeks sell off so strong was the fact the market was way overbought on the short term time frame and looking ready for a correction already. So we saw twice the selling pressure crammed into one week.

Looking back at a 12 year chart of the Dow Jones Industrial Average we can see the market is now trading at a major resistance level. There are two scenarios the market will likely follow in the coming 12 months. And it could take a year for each of these scenarios to unfold.

Scenario #1 – The market could top then start heading lower to test the 2009 March low. I don’t want this but it could still happen. Topping is a process. Unlike most bottoms which happen very quickly, tops tend to drag out much longer. In this case I figure we are looking at 4-12 month time frame for the market to truly roll over and confirm that we are in a major bear market again.

Scenario #2 – If the market holds up relatively well and forms a bull flag then we can expect to see higher prices in the future. If this happens it will take 4-12 months to unfold also.

Both scenarios have characteristics associated with them, so as the market progresses I will update on the market internals which will help tell us if the underlying market is holding up well or deteriorating. Only time will tell and we will play it one candle at a time.



Gold Stocks – Rockets or Rocks?

The gold stock index closed below its support trend line which held up for over a year. This is not a good sign for gold or gold stocks but there is light at the end of the tunnel.

Simple technical analysis is telling us to be cautious at these price levels. If we zoom way out on the charts the current price level and chart patterns on these charts scare me. The gold stock/Gold ratio chart is trading under resistance and the HUI (gold stock index) is trading near the 2008 high. What I do not like is the technical breakdown on the HUI monthly chart. You can see the trend line break on the chart with my small zoomed in picture.

The good news is that everything looks to be extremely over sold on the 60 minute charts so I am expecting a bounce across the entire market for a 1-5 day dead cat bounce. Friday we did see gold stocks move up strong off their lows out performing the price of gold. This is positive for gold and stocks. Depending on how that unfolds we could take a short term momentum play to profit from a possible leg lower.



Precious Metals ETF Daily Charts – Gold & Silver
Gold and silver lost some shine last week as they plunged towards their next support level. A bounce is expected but then I feel we are heading lower and this will likely shake out the majority of traders before starting another rally higher.



Energy Fund Trading – USO & UNG



Commodity and Stock Market Index Trading Conclusion:
This month looks and feels like last Jan – March, but reversed. The market is now getting choppy as the bulls and bears fight for direction making is difficult to swing trade. Times like these are best for intraday traders, not swing traders. Trading tops is actually much more difficult than trading a bottoming market in my opinion so I will be picky with trade setups. My number one goal is to preserve capital and avoid choppy market conditions as part of managing risk.

Final trading thoughts, I look for the broad market to get a possible bounce this week, but I feel lower prices are still to come. The USO oil fund looks prime for the picking and that could be our next trade.

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ETF Update - Gold, Silver and Oil Out Perform their Equities?

Since the market crash in late 2008 we have seen investors favor quality stocks that pay dividends and have steady earnings. Fast growth companies and equities with physical resources like commodities have also done well.

Let’s examine the monthly charts of gold, silver, oil and natural gas, and observe how they have traded in comparison to their mining equities

Gold – Monthly Chart
Looking at the monthly chart as far back as 2004, we see that gold has formed the same patterns repeatedly. This has created a stair step pattern and allows us to calculate measured moves and a time frame for this to take place.

As we can see gold has broken its 2008 high and is starting another rally which we have seen several times before. I figure we could see gold rally for another 3-5 months and possibly reach the $1500 -$1600 level before forming a multi month or year consolidation.

Investors around the world are buying gold because it is a physical product which has been proven to hold its value.


Silver & Precious Metal Stocks – Monthly Chart
Silver and PM stocks have been trading in tandem since 2004 and we can see this by looking at a price performance chart of both silver and the HUI index. The interesting part is that the physical commodity silver has held its value better than the stocks during corrections.
Apparently investors prefer tangible investments over stock certificates of mining companies in periods of increased volitility. Lower risk is in the commodity.


Oil – Monthly Chart
Crude oil has held its value over energy stocks for the majority of the time since 2003. And currently, investors are more comfortable holding oil as a safe investment over energy stocks.


Natural Gas – Monthly Chart
Natural gas is the energy sector’s underdog in my eyes. The world has found so much natural gas in the ground and discovered cost effective ways to collect gas that it will continue to see investors move away until inventory start to deplete.


Commodity Trading Conclusion:
Investors around the world continue to put money into gold which is a universal hedge against inflation. The broad market appears to be trading at a major resistance level. Tops in the market generally take a much longer than to reverse directions than market bottoms. We will not knot for sure if we are entering a top for a couple months as the charts unfold. Now that commodities are trading back at reasonable levels I think they will hold up better than equities if the market starts to correct.

We continue to enter low risk setups and trade with this strong up trend but are aware that we must be protected and focus on the lower risk plays.

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Energy ETF Trading Report - USO and UNG

So far this week has been generous with our commodity ETFs moving higher, other than natural gas which is clearly in a bear market. Each of the commodity ETF trading charts below is at a different stage and it will be interesting to see how things unfold in the coming weeks.

Trading ETFs is very rewarding when done properly and using multiple time frames for timing your entry and exit points is crucial. My main focus is on the weekly and daily charts but I use a 30 minute intraday chart when the time comes to actually pick an exact buy or sell point. Below I have provided both the weekly and daily chart so you can see how the same ETF looks completely different on the two time frames.

USO Fund Trading – Weekly & Daily Trading Charts
While gold and silver have been moving higher oil has been flagging sideways taking a breather. Both the weekly and the daily charts are aligned for a nice move higher if the trend and charts follow through on their patterns. We could get some tradable action in the next couple days.


UNG Fund Trading – Weekly & Daily Trading Charts
Natural gas is really starting to slide. Wednesday UNG dipped below the Sept low of $8.94 by a couple cents then moved up into the close. Overall it’s not bullish. This could be the start of a waterfall sell off which is a sharp heavy volume sell off that lasts 3-5 days.


Commodity ETF Trading Conclusion:
To sum everything up the gold and silver ETFs are on fire as they continue to surge higher. Being ready for a sharp reversal is important if you want to lock in gains on a portion of your position.

Crude oil is taking its time but looking ripe for a breakout higher. We continue to watch for some action.

Natural gas continues to get pushed down and it’s not looking good for higher prices anytime soon. We are waiting for a shorting opportunity or an oversold condition to play a 1-5 day bounce.

Quick Trading Tip: If you have a position which has done well and has moved up for an extended period of time be sure to draw some trend lines and tighten your stop, or set a stop, under a tight trend line. Sell some of your position (25-50%) to lock in gains and let the core position continue to mature. If you get a pullback to a support level (previous breakout level) you can buy back your other part of your position at a lower price.

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ETF Commodity Trading Analysis & Charts - USO & UNG

Commodities continue to perform well as the US dollar tests the October lows. If we step back and take a look at the weekly charts of the gold, silver, oil and natural gas ETFs we can get a better feel for what to expect in the coming week.

Trading commodity ETFs can be a very fun and profitable experience when done correctly. The first things I always analyze are the longer time frame charts. This allows me to see past support and resistance levels and determine whether the investment is trending up, down or sideways.

Let’s take a look at crude oil and natural gas.

USO Fund – Weekly Chart
The USO fund continues to look bullish as it consolidates the breakout with volume getting lighter. We could see a bounce this week and if we do I will be watching for a low risk entry setup.


UNG Fund – Weekly Chart
UNG continues to trend down and under perform the market. The last time UNG dropped to this level we had a nice bounce generating a 30% move in 3 weeks. But I don’t think that will happen this time. The price has been sliding lower slowly on light volume. This type of price action is not as predictable when compared to others. I will wait for a proper setup before buying an oversold bounce or shorting after a bounce.


Commodity ETF Trading Conclusion:
The weekly charts don’t lie. Trade with the underlying weekly trend and you will put the odds in your favor. I use the daily chart and 30 minute intraday charts for timing my trades as those time frames have proven to be very accurate with commodity ETF investments.

WE continue to be hold our golden rocket stocks and GLD fund. If the market co operates this week we could get some trading signals for both Canadian and US ETF funds.

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USO and UNG Mid Week Trading Tips

Crude oil has a nice bull flag and we are waiting for a breakout and setup while natural gas continues to see selling pressure.

USO Fund Trading – Daily Fund Chart
The USO oil fund broke out a few weeks ago from the large pennant pattern. The price has been flagging for about 3 weeks now. It looks like we are getting close to a low risk setup so I am keeping a close eye on this fund.


UNG Fund Trading – Daily Fund Chart
Natural gas continues to under perform the rest of our commodities. This fund is starting to look like another good by point but we need a few things to fall into place before that happens. Let’s not jump the gun because this fund is still in a bear market. Waiting for a setup.


Waiting for these exchange traded funds to generate low risk setups and watching our current positions mature is the boring part of trading. It’s these slow times when traders get bored and start taking more risk by entering positions that do not have clear entry and exit points. Not having clear entry and exit points will lead to traders holding on to losing trades and not taking profits on winning trades. Be sure you enter positions which you know where you should get out if the trade goes against you and where to take some money off the table if it rallies higher.

ETF Trading Conclusion:
We continue to wait for trading opportunities to unfold. We focus on taking advantage of low risk setups and avoiding times the market when things are choppy and unclear.

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Crude Oil and Natural Gas ETF Trading

The past week in gold, silver, oil, natural gas and the broad market wasn’t anything to write home about. We are seeing controlled profit taking which is making the market choppy. Many traders are getting very bearish on the market which is a good thing in my opinion. According to my market internals, sentiment and volume analysis we should get a shake out (sharp dip) which would make traders exit their positions before the market continues higher.

Some trader’s say we are in a bull market, others say we are in a major bear market. Either way the trend is up on the daily and weekly charts and companies are making money. Buying on over sold dips has been very profitable this year. Until I see things drastically change, this is my strategy for the broad market.

Lets take a look......

Crude Oil – USO Exchange Traded Fund
Oil has been making a strong rally after breaking out of is multi month consolidation pattern. We are now looking for some type of pullback or test of breakout for another low risk entry point.


Natural Gas – UNG Exchange Traded Fund
Natural gas is having some trouble breaking out above the multi month resistance trend line. Buying here is a 50/50 bet and I will wait for another entry point before putting our money to work.


Crude Oil and Natural Gas Conclusion:
Overall, the market feels ready for quick snapback to shake traders out of profitable positions. I expect a resumption of the up trend as the market slowly creeps higher at a steady pace digesting each rally with sideways movement.

I know many people are shorting the broad market and that is not something I am willing to do yet. Until I see a drastic change, long positions are my bread and butter. Once the market does reverse, there will be plenty of time to play the short side using the Leveraged ETFs.

Commodities are taking a breather but with our support trend lines nearing I expect some movement this week.

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