How To Trade A Volatile Market

At Active Trading Partners, we take a different approach to trading than most online services in terms of advising our subscribers. Our methodology revolves around behavioral characteristics of the crowd, and taking advantage of the extremes in sentiment, whether bullish or bearish.

In the case of ETF trading, we often work with 3x Bull or Bear ETF’s like BGZ, ERY, ERX, TZA, TNA and so forth. Using a combination of Fibonacci re-tracements and Elliott Wave theory, we look for high probability set ups and extreme overbought or oversold situations to trigger a trade recommendation. A most recent example with ETF’s was a short position we took against the rising energy stock index, the XLE. This index had become incredibly overbought in just a few weeks, and looking at prior topping indicators and fibonacci trading day cycles, we felt it was a “Low Risk” bet to short the rally. We recommended ERY at $45.40 as the XLE headed over $56 and was becoming overbought. Within 7 days we had a 15% plus gain by going against the crowd. I saw a 13 fibonacci day trading rally at extremes, so we used the XLE chart below, to identify the timing to enter into ERY.

We use the same approach when it comes to trading individual stocks. We look for “Waterfall decline” reversal patterns, which are somewhat proprietary for ATP and our methodology. This method reduces our entry risk because we are buying stocks that have already taken a recent short term multi-day or even multi-week hit as investors have exited the stock. Recent examples include buying DCTH, a former high flier that fell from $16 down to $5.80 when ATP advised purchase. Within days the stock bottomed and ran to as high as $9 within a few weeks for a 50% move. Another example is OREX, who took a hit in concert with VVUS several weeks ago. We felt the sell-off was overdone and recommended the stock at $4.01, after it dropped from $6. The stock ran back to $5.30 within 10 days for a 30% plus gain.

Trading in a volatile market means you need to be patient, discerning, and wait sometimes for an oversold or overbought condition before you act. Sometimes acting early can cause you to get spooked out of positions that end up being profitable, but only after you panic sell out at a loss. At ATP, we use a “tranche buying” methodology which tries to help with the emotional side of entering or exiting a trade. We recommend 1/3 or 1/2 positions at a time, even if we are really confident in our entry point. This way just in case you mis-timed the bottom of your target by one or two days, which often happens, you reserve some powder to add additional capital into the trade to work your way in over several days. We also advise that our partners enter into these tranches over 24 hours of trading time, perhaps buying 3-4 times into our position especially on minor pullbacks. How many times have you bought into a trade entry at say $5.00 a share, and two days later the position bottomed at $4.50, you close it for a loss, and then it runs to $6? Using a tranche buying methodology keeps your emotions in check and you actually look for a bit further dip as a benefit, not a detriment to your trading.

We also adjust our stops as the stock or ETF moves after we have completed our entry. The main goal as a trader or investor is to book profits and limit losses when you are wrong. Since our ego is often our worst enemy, adjusting your stops as the trade moves in your favored direction keeps you from gettting too giddy and letting a profit slip away. In addition, a reasonable stop prevents you from being over-confident and letting a small loss turn into a larger one. Another recent sample at ATP was buying into VITA, which was very oversold at $1.76-$1.80 ranges. We also though advised our partners take profits at $1.92-$1.97, with a nice and tidy 6-10% gain over 7-8 days of hold period. The stock then fell hard just a few days later to $1.64. Not taking profits would have meant wiping out all of your hard work and watching your paper profits turn into a “hoping for a rebound” position.

In volatile markets, don’t get off your game plan and try to keep your ego in check. Enter into your trades no matter how confident you are, slowly and over 24-48 hours of trade time. Adjust your stops and prevent yourself from getting too greedy or giving away profits. Take your time, wait for set ups, and also take a break every now and then....nobody needs to trade everyday.

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Markets Begin The Dog Days of August, Crude Oil Closes Near Session Low

The U.S. stock indexes closed narrowly mixed today. As we are into the "dog days" of August, when trading volume typically declines, I do not look for strong trending price action in the stock indexes in the near term. Come early September, look for trading volumes and volatility to pick up significantly.

Crude oil closed down $0.19 at $75.20 a barrel today. Prices again closed nearer the session low today and hit a fresh five week low. Bulls have faded badly to suggest a near term market top is in place. The next near term upside price objective for the bulls is producing a close above psychological resistance at $80.00 a barrel.

Natural gas closed down 10.1 cents at $4.227 today. Prices closed nearer the session low today and hit a fresh 11 week low. The bears have the solid overall near term technical advantage. A two month old downtrend is in place on the daily bar chart. The next upside price objective for the bulls is closing prices above solid technical resistance at $4.70.

Gold futures closed up $9.60 at $1,226.20 today. Prices closed nearer the session high and hit a fresh six week high today. Bulls have gained upside near term technical momentum recently, including more today. The gold market has seen safe haven buying interest recently as investor risk appetite has shrunk. The U.S. dollar index was lower today, which also helped out the gold market bulls. Gold prices are in a three week old uptrend on the daily bar chart.

The U.S. dollar index closed down 44 points at 82.59 today. Prices closed nearer the session low today and saw a corrective pullback from recent gains. Bears still have the overall near term technical advantage. Bulls' next upside price objective is to close prices above solid technical resistance at 84.00.

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Phil Flynn: As Oil Prices Hit The Lowest Levels Since July 19th

As oil prices hit the lowest levels since July 19th people are starting to realize something I have been saying for a very long time and that is, the price of oil is not acting on its own but is being driven by outside macro economic forces. I have said time and time again that the price of oil really has been acting as a pawn in the economic recovery and is being driven in large part by economic forces. When the Fed prints more money and the dollar falls and the stock market rises then oil rallies. As the outlook for the economy gets gloomy, like after the Fed meeting last week, stocks fall, then oil gets hit and goes lower. In other words, the fundamentals of supply and demand for oil are dependant totally on the Fed and the prospects for the economy.

Of course when I first started to write about these phenomena, it was met by skepticism by a great many people. Some felt that it was a case of the oil market changing because we hit peak oil or was the byproduct of evil speculators. Yet in today's Wall Street Journal, they are writing about what has become so clear to many. The Journal says, “From Houston to New York, energy traders and commodity investors are watching a new and unusual market phenomenon: a persistently high correlation between oil and stocks. Crude oil is now influenced more by the stock market than by its own inventory levels or demand patterns.....Read the entire article

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Gold, Crude Oil, SP500 and Dollar At Key Pivot Points

Last week was exciting as investments rocketed higher or tank… We saw Gold and the US Dollar pop while oil and equities dropped sharply with heavy volume.

Just to recap, Wednesday the market went into free fall mode sending traders and investors running for the door. This was obvious from looking at the large percent drop coupled with heavy selling. That day the NYSE showed panic selling with 37 shares sold for every 1 share purchased meaning pure panic. In my Wednesday night report “How to Take Advantage of Panic Selling for SP500 and Gold ” I explained how to read these extreme market conditions and what to expect the following sessions.

Currently the price of gold, oil, spx are trading somewhat at the opposite extremes seen last week. Below are a few charts explaining the situations:

GLD – Gold ETF Trading Signals
This 60 minute chart shows gold getting hit hard on Wednesday morning. Investors and traders around the globe were closing out positions and moving to cash. This high volume dumping of positions pulled virtually all investments lower and was the first tip-off that the market was in panic mode.

One the dust settled and investor’s regrouped we saw money surge back into gold creating a nice pop the following day. Problem I see is that gold is now trading at a key resistance level when reviewing the daily chart. And if you take a look at the 60 minute chart below you can see the price of gold sold down in the morning on August 13th and drifted up into the close on Friday forming a bearish wedge. Also there was some very strong selling just before the market closed which is also a concern.

USO – Oil Traded Fund
Both times oil has fallen we have seen the price pierce key support levels where the bulls would have the majority of their stops placed. The intraday pierce causes the stops to be triggered washing the market of long positions while the smart money loads up accumulating everyone’s sell orders . This is something which happens with virtually every type of investment and the main reason traders get shaken out just before the market goes in their direction. Anyways, running of the stops is something I will cover in a future report.

Looking at the chart below you can see oil trading at trendline support. Each time the key support levels (blue arrows) have been pierced the market has rocketed higher. Just from looking at the chart from August 9th forward you can see that this move down is overextended and visually looks ready for a pause or bounce in the coming days.

*Trading Tidbit - When trading trendlines it is important to try and play the third test. Reason being is that the first two pullbacks create the trendline and the third test is when active traders generally jump on board causing a sizable bounce. Each test of a trendline it becomes weaker and the probability of a breakdown is more likely.*

SPY – SP500 ETF Trading Fund
The SP500 chart shows last week’s breakdown on the 5th test of the trendline. The market is oversold here and ready for a bounce which I hope we get this week. My concern is that the downward momentum is to strong and a bounce will be negated.

US Dollar Index
US dollar put in a huge bounce last week after testing is 61.8% Fib retracement level from the 2009 December low. The strong bounce has pushed the dollar up to a key resistance level which happens to be 38.2% Fib retracement level from both the December up trend and the recent sell off. I figure this will hold the dollar down for a few days easing the pressure on oil and equities.

Gold, Oil, SPX and Dollar Trading Conclusion
In short, I feel there will be a relief bounce in oil and equities while the dollar and gold will have some profit taking and trade sideways or down at the beginning of the week. After that it looks as though stocks and oil will head lower while the dollar and gold rally.

If you would like to receive Chris Vermeulen's Trading Analysis and Signals Complete with Entry, Targets and Protective Stops please visit his website at The Gold And Oil Guy .com



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Crude Oil Market Commentary For Monday Morning

Crude oil was slightly higher due to short covering overnight and is consolidates some of this month's decline. Stochastics and the RSI are becoming oversold but remain bearish signaling that sideways to lower prices are possible near term.

If September extends the aforementioned decline, the reaction low crossing at 74.70 is the next downside target. Closes above the 10 day moving average crossing at 79.42 would confirm that a short term low has been posted.

First resistance is the 20 day moving average crossing at 78.93
Second resistance is the 10 day moving average crossing at 79.42

Crude oil pivot point for Monday morning is 75.71

First support is last Friday's low crossing at 75.01
Second support is the reaction low crossing at 74.70

The "Super Cycle" in Gold and How It Will Affect Your Pocketbook in 2010

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Crude Oil Weekly Technical Outlook For Saturday August 14th

Crude oil's fall from 82.97 extended further last week and the break of  75.9 support, as well as the close below near term rising trend line, serve as an important alert that whole rebound from 64.23 is completed at 82.97 already. Initial bias will remain on the downside this week and deeper fall should be seen to 71.09 support next. On the upside, above 77.40 minor resistance will turn intraday bias neutral and bring recovery. But risk will now remain on the downside as long as 82.97 resistance holds.

In the bigger picture, choppy rebound from 64.23 is treated as a correction to fall from 87.15 only and has possibly finished at 82.97 already. Break of 71.09 will affirm this case and indicate that whole fall from 87.15 is resuming for 60 psychological level, (50% retracement of 33.2 to 87.15 at 60.18, 100% projection of 87.15 to 64.23 from 82.97 at 60.05). Decisive break there will indicate that fall from 87.15 is developing into a powerful impulsive wave and would target 33.2 low. On the upside, even in case of another rise, focus will remain on reversal signal as crude oil enters into resistance zone of 82.97/87.15.

In the long term picture, current development suggests that rebound from 33.2 is finished at 87.15, inside 76.77/90.24 fibo resistance zone as expected. Our view is that fall from 87.15 would develop into the third falling leg of the whole correction from 147.27 and hence, we'd anticipate an eventual break of 33.2 low in the long term as such correction extends.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Phil Flynn: 19th Market Breakdown

Ben’s the kind of person you meet at certain dismal, dull affairs, center of the crowd, talking much too, stirring' up the bulls and the bears. Well it seems to me that you have seen too much in too few years and though you try you just can't hide your eyes are edged with fears, you better stop and look around, here it comes, here it comes, here it comes, here it comes, here comes your 19th market breakdown. Oh, who's to blame, that market's just insane? Well nothing Ben does don't seem to work It only seems to make matters worse. Oh, please.

You better stop and look around, here it comes, here it comes, here it comes, and here it comes here comes your 19th market breakdown. While the oil market tried to find solace in some strong data out of Germany as its GDP jumped 2.2 in the second quarter, the fastest pace for at least two decades the market is still reeling from a dismal week and dismal initial jobless claims report that increased 2,000 to 484,000 in the week ended Aug 7, the highest level since mid-February.....Read the entire article.

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Crude Oil Trades Near Four Week Low After Retail Report Falls Short of Estimates

Crude oil fluctuated after sales at U.S. retailers rose less than forecast in July and the cost of living climbed for the first time in four months. Oil traded at its lowest level in four weeks as a lack of jobs prompted Americans to hold back on spending, according to figures from the Commerce Department. The increase in the consumer price index points to a stabilization that may ease concern that a slowdown in growth will spur deflation.

“The economic picture is unsettled,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The fundamentals are weak, with high inventories and weak demand, so the market has a hard time holding above $80.” Oil for September delivery fell 7 cents to $75.67 a barrel at 10:24 a.m. on the New York Mercantile Exchange. Earlier, it touched $75.32, the lowest price since July 16. Futures have fallen 6.2 percent this week, the most since the week ended July 2.

Retail sales increased 0.4 percent last month, following a revised 0.3 percent drop in June. Economists projected a 0.5 percent gain, according to the median estimate in a Bloomberg News survey. “The retail sales numbers were a little disappointing, which moved the market lower for a bit, but we’re holding on here,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York.

The consumer price index increased 0.3 percent, the most in a year and exceeding the 0.2 percent gain projected by the median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington.....Read the entire article.

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Is it Time to Buy Natural Gas?

The current price in natural gas has a lot of traders taking positions. So is it time to buy natural gas? Let's take a look at our Smart Scan Chart Analysis. It confirms that a strong downtrend is in place and that the market remains negative longer term. Strong Downtrend with money management stops. A triangle indicates the presence of a very strong trend that is being driven by strong forces and insiders. Based on a pre-defined weighted trend formula for chart analysis, UNG scored -100 on a scale from -100 (strong downtrend) to +100 (strong uptrend).

-10......Last Hour Close Below 5 hour Moving Average
-15......New 3 Day Low on Thursday
-20......Last Price Below 20 Day Moving Average
-25......New 3 Week Low, Week Ending August 14th
-30......New 3 Month Low in May
-100.....Total Score

Here is a preview of our MarketClub Trade Triangle Chart Analysis and Smart Scan technology


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Crude Oil, Natural Gas and Gold Market Commentary For Friday Morning

Crude oil was slightly higher due to short covering overnight and is consolidates some of the decline off last week's high. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near term.

If September extends the aforementioned decline, the reaction low crossing at 74.70 is the next downside target. Closes above the 10 day moving average crossing at 80.04 would confirm that a short term low has been posted.

First resistance is the 20 day moving average crossing at 79.02
Second resistance is the 10 day moving average crossing at 80.04

Crude oil's pivot point for Friday morning is 76.41

First support is Thursday's low crossing at 75.52
Second support is the reaction low crossing at 74.70

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Gold was lower due to profit taking overnight as it consolidates some of Thursday's rally. Stochastics and the RSI remain neutral to bullish signaling that sideways to higher prices are possible near term.

If October extends the rally off July's low, the reaction high crossing at 1220.80 is the next upside target. Closes below the 20 day moving average crossing at 1190.40 would temper the friendly outlook.

First resistance is the overnight high crossing at 1218.60
Second resistance is the reaction high crossing at 1220.80

Gold pivot point for Friday morning is1211.0

First support is the 10 day moving average crossing at 1199.20
Second support is the 20 day moving average crossing at 1190.40

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Natural gas was slightly higher overnight as it extends this week's trading range. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term.

If September renews last week's decline, May's low crossing at 4.140 is the next downside target. Closes above the 20 day moving average crossing at 4.557 confirm that a short term low has been posted.

First resistance is the 10 day moving average crossing at 4.467
Second resistance is the 20 day moving average crossing at 4.557

Natural gas pivot point for Friday morning is 4.308

First support is Wednesday's low crossing at 4.257
Second support is May's low crossing at 4.140

How to Take Money and Emotion Out of The Gold Market

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