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FOREX PATTERNS AND PROBABILITIES by ED PONSI

2012-01-26T23:18:00.000+07:00

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The-Psychology-of-the-Foreign-Exchange-Market.pdf

2011-04-13T11:06:00.000+07:00

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The Trade Price Method

2011-04-08T20:42:00.001+07:00

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Value in Time Better Trading Through Effective Volume by Alexander Elder.pdf

2011-02-12T12:06:00.001+07:00

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Turning Losses Forex Trades into Winners by Gerald E Greene.pdf

2011-02-12T12:04:00.000+07:00

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Financial-Markets-Tick-By-Tick-by-Pierre-Lequeux.pdf

2011-01-30T13:35:00.001+07:00

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The-Day-Trader-s-Manual-by-William-E-Eng.pdf

2011-01-22T15:15:00.001+07:00

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Technical-Analysis-The-Complete-Resource-for-Financial-Market-Technicians-by-Charles-D-Kirkpatrick.pdf

2011-01-22T14:47:00.000+07:00

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Pattern Price and Time Using Gann Theory by James A Hyerczyk

2011-01-14T14:28:00.001+07:00

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Download Forex and Stock Market Ebooks 110111

2011-01-11T16:27:00.002+07:00

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2011-01-03T00:57:00.002+07:00

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2010-12-18T13:33:00.016+07:00

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F:GOLD IS IN HOT WATER

2010-12-18T04:42:00.000+07:00

Life has a funny way of reminding a person that he is not really in control of what is going on around him. While he may be proficient in a few specific areas, his overall knowledge is limited. Last night my hot water heater decided to go on vacation and I thought I’d try to be a real man and fix it. I have a general knowledge of how a hot water heater works, but it dawned on me that knowing how it works and fixing it are two totally separate things.

I immediately realized that I was in over my head and made arrangements to have a repair man come and fix my hot water heater. He arrived first thing this morning and I asked if I could watch not only out of curiosity, but to understand how my hot water heater worked and to learn about the man that was fixing it. He was gracious and took the time to explain my issue thoroughly and as I am writing this he is replacing my heating elements.

The interesting thing about this whole chain of events is that he brought up investments with me. Not because he wanted to talk to me or thought I knew anything, but simply because he knew I worked in that field. When you live in a relatively small town and people knew what you do for a living, they are generally quick to ask questions. He told me what he was doing with his retirement accounts and his plans for retirement in great detail.

I immediately respected him for his general knowledge and it was apparent he had done his own homework. He had made wise decisions, saved money, and invested wisely. Clearly the man working on my hot water heater was planning for a quality retirement lifestyle and it sounded as though his planning was going to pay off. He brought up that he had purchased the copper ETF $JJC when he noticed that copper pipe was becoming more difficult to acquire and he was paying more for it.

Then the conversation changed dramatically as he explained to me that he had recently bought gold coins and the gold ETF GLD. Immediately my ears perked up as I follow gold and oil quite closely as regular readers are aware. He wanted to know if I thought he should buy more on dips and if he had purchased gold at a good price. He told me he thought he had bought around the $1,200 an ounce price level. I replied that I was not qualified to offer investment advice, but that I expected gold was likely going to go through a mild pullback in coming days and weeks.

He did not really ask any questions, but he said he was planning on adding to his position in GLD as he indicated that acquiring physical gold today is quite difficult. I told him that longer term I think gold will be an outstanding asset class to own, but I would be patient and wait to buy when the weakest gold bulls bow out. This conversation went on for about 15 or 20 minutes and eventually he got back to his work and I got back to my screens. I immediately looked at the GLD chart and this is what I saw this morning.

GLD Hourly Chart:

My previous article, A Correction in Gold is an Option discussed the overwhelming bullishness that gold and silver were garnering with the retail crowd. After publishing that article last week I received more than a dozen emails that I would classify as hate mail. I was called names, I was sent a poorly written manifesto of the future collapse of fiat currency, and finally my favorite email which was just two words in the subject line, mother ($#$$@# – I’ll let your imagination try to figure out that one). I have written about a variety of asset classes and none of them have the near vigilante bullishness associated with gold.

Gold bugs believe that the world as we know it is going to collapse. They believe that in a few months they will be bartering their gold for food, land, and valuables. Some of them believe the central bankers are working together to create a giant world order. The emails that I have received speak for themselves. There is a growing fear among the retail / middle class investor and the war often discussed between the haves and the have-nots wages on.

When sentiment is running this high and the repair man working on my hot water heater is discussing with me his gold ownership and his desire to own more, it would seem bearish. I have heard and read countless stories about taxi cab drivers talking about the stocks they were trading during the dot-com bubble. I vividly remember having coworkers who had no experience in real estate buying multiple homes to “flip” during the housing boom. Today the man working on my hot water heater is telling me about his gold ownership and how he plans on buying more.

I do not need to remind readers what happened after the technology bubble or the housing bubble, but what if commodities are in bubble? Some have argued they are, others say they are only beginning to rise as hyperinflation is on the way. It seems the real argument in this discussion is more about inflation versus deflation. I for one am not an expert in this field or any other based on my experience last night with my hot water heater, but financial markets tend to operate in the opposite of the herd’s expectations.

The gold trade is full, physical gold is hard to purchase, and the dollar has declined significantly in the past 10 years. There are many expert economists that are screaming inflation is coming and that commodity prices such as precious metals, grains, and energy prices are going to skyrocket. It seems that is the rally cry coming from economists and the herd’s investment habits seemingly back up this notion. I am a contrarian trader and investor as I have struggled to make money following the herd. Is the herd leaning toward inflation right now?

Gold can hold its value during a deflationary period so long as that period of time is relatively short. However, a long term deflationary period could be troublesome for gold bulls. Again, I am not an expert in these matters, but it sure seems as though there is a growing battle between the deflationists and inflationsists and the herd appears to back the inflationists. While that does not necessarily mean that inflation will not rear its head, it just might mean a period of deflation will occur prior to that move. It would appear to me that a mild correction in gold is possible and I intend to use that correction as a buying opportunity. The U.S. Dollar Index futures chart is listed below.

GLD Daily Chart:

With sentiment running this high, retail investors crowding into precious metals, and the dollar receiving no love – this is a perfect contrarian storm. This situation is the very reason that gold could correct deeper and longer than what many investors might expect causing the retail crowd who was buying around the $1,425-$1,450 price level to get nervous and sell, just when price is about to change direction. This seems to be an ongoing situation that inevitably happens in almost every asset class at some point or another.

While I do expect lower prices in gold in the short run, I still remain bullish in the long term. At the end of the day, I have always made more money trading against the herd than trading with it. If my hot water repair man is discussing buying gold, it would make sense that the smart money would be selling into the retail investors and traders during price peaks and buying from them near the intermediate lows. Interestingly enough, the chart below illustrates the heavy volume selloffs that have been taking place in gold.

In closing, I’m sure this article will arouse more gold bugs from their slumber and fill my email inbox with more hate mail. I will shrug it off as I always do, but the real question I have is am I going to have hot water tonight?

The Inverse Dollar Relationship, SPX and Fear

2010-12-16T22:04:00.002+07:00

So far this week we have been seeing fear creep in the equities market. This Wednesday we started to see fear (green indicator) reach a level which tells me to start looking for the market to bottoming. I do follow a few other charts and indicators which warn me of a possible trend reversal (high probability setup) before it takes place but the US Dollar and selling volume are key.

As we all know, when the market is trying to top and roll over it tends to be more of a process than a couple day event. It’s this lengthy topping process which has a lot of choppy price action sucking traders into a position much to early or shakes you out of the position before the market does what you anticipated. Knowing that tops tend to drag out for an extended period of time is critical for anoptions trader simple because of Theta (time decay)

On the flip side, bottoming is more of an event because it tends to happen after a strong wave of panic selling. Fear is the most powerful force in the market (other than the Fed/Manipulators.. but that’s another topic). That being said, when you know what to look for in bottoms you can generally see the market starting to bottom and prepare for it.

The charts below of the US Dollar Index and the SPY clearly show the inverse relationship they have. Right now it seems everything is directly connected with the dollar… it has been like that for most if the year… I will note that its not normally this clear. Anyways, the dollar is currently trading at resistance which means there is a good chance it will turn back down. So if the dollar drops, then it should boost the SPY (equities market) and put in a bottom for stocks.

Looking at the lower chart of the SPY etf you can see that recent prices have dropped down to a support zone. The important thing to note here is how selling volume is ramping up. This to me means more traders are getting worried and are cutting their losses or locking in gains before it gets worse. We typically see panic selling enter the market near the end of pullbacks. Just like in a bull market where the retail trader (John Doe) is the last to buy into a stock before it falls, it’s the same but flipped in a down trend. The retail trader is the last to panic and sell out of their position before the market bounces/rallies.

Currently the equities market looks to be showing signs that a bottom is nearing. Over the next session or two the rest of this equation should come to light as a tradable bottom or to start playing the down side of the market, only time will tell…

If you would like to learn more and get my trading alerts along with my pre-market morning videos so you know what to look for in the coming session I recommend taking up a subscription with my ETF trading newsletter here: www.TheGoldAndOilGuy.com

Gold & the Overall Strength of the Market

2010-12-13T08:50:00.002+07:00

The past week has been interesting to say the least. Gold is trying to find support while the SP500 grinds its way higher. Let’s jump into the charts and analysis to get better feel for what I feel is happening here.

Gold 4 Hour Chart
As you can see from the chart below gold has formed a possible double top. The fact that it made a higher high is actually a bearish sign for the intermediate term 1-3 weeks. When we see a higher high getting sold into with big volume it typically means the big money is unloading large positions into the surge of breakout traders and short covering that occurs when a new high is reached. Following the big money is very important to keep an eye on as it can warn us of possible trend changes before it occurs.

The current selling volume is not exactly a healthy sign if you are looking for higher prices in the near term. If this pattern breaks down I would expect $1340 to be reached very quickly.

Keep in mind gold it in a strong up trend still. Shorting is not the best play in my opinion. I prefer to see pullback which washes the market of weak positions then jump on the long side for another bounce/rally.

SP500 Market Internal Strength – 10min, 3 days chart
I watch these charts to get a feel for the overall market strength on a short term basis. The top chart shows the SPY etf breaking above a resistance trend line on Friday afternoon. This occurred on light volume meaning it is mostly likely a false breakout and Monday we could see a gap lower at the open or a pop & drop. The two other indicators are reaching an extreme level which normally tells us a pullback is due in the next 24-48 hours of trading. The question is, will us just be a bull market pause or will we get a decent pullback.

The red indicator in the top chart and the red indicator levels on the charts below that help us time the market as to when profits should be taken or to tighten our stops if we have any long positions.

The broad market is still in a very strong uptrend so moving stops up and buying on oversold dips is the way to play it.

Weekend Market Analysis Conclusion:
In short, both gold and the stock market are in a bull market (uptrend). Trying to pick a top to short the market is not a good idea. Instead I am looking for an extreme oversold condition to help reduce downside risk before taking a long position.

The overall strength of the market (SP500 and Gold) I think are starting to weaken but in no way am I going to short them. We continue to buy dips until proven wrong because indicators can stay in the extreme overbought levels for a long period of time. Generally the biggest moves happen in the last 10-20% of the trend.

A GOLD CORRECTION IS AN OPTION

2010-12-11T06:16:00.000+07:00

In the past few weeks I have made the case that gold might be nearing a correction. I understand that people get defensive regarding gold (no pun intended), but I do not think vulgarities should be expressed towards someone who is pointing out the overbought nature of the daily and weekly charts. It seems any time that I discuss a possible pullback in gold I place a giant target on my back for people to make nasty public comments or send me hateful emails which in some cases I find particularly amusing. To each his own, but something tells me this article will be as well received as an oral reading of the history of the Illuminati at a Christian Christmas celebration.

Before you all rush to berate me for saying gold may go through a mild correction, read this paragraph before you take my work and my name through the proverbial mud . . . AGAIN. Before discussing why gold may go through a short-term correction, I would point out that in the long term I believe gold is in a secular uptrend that could last much longer than many market pundits or traders might prognosticate.

I do not hold myself out to be an economist, but it appears to me that there are several catalysts looking towards the future that likely will give gold a boost. Unfortunately, the reasons gold could continue rallying are not economically pleasant and certainly not exciting to discuss as by now they have been beaten into our psyches. Instead of pounding the table about all of the various reasons investors should own gold, I am going to focus on a potential opportunity to buy gold at lower prices.

Based on a variety of technical indicators and analysis paired with some fundamental opinions, a trader could make the case that gold is in need of a downward price correction. Gold has been purchased with strong volume for more than a year as a result of several reasons. When looking at a weekly chart of the gold ETF GLD it becomes apparent that the shiny metal is overbought and in need of a pullback, or at a minimum some healthy consolidation.

As can be seen above, gold remains in a strong uptrend and price is well above the 50 period moving average. In fact, the 50 period moving average on the weekly GLD chart has not been tested since April of 2009. The long term trend remains bullish, but as stated above stated above not needed here a pullback is possible.

If we take a look at the GLD daily chart we notice the same long term uptrend that that is needless here we witnessed when looking at the weekly chart. In contrast the daily chart does show potentially bearish formations beginning to work. While the bearish formations patterns, too close previous use of formations may fail or may turn out to be totally false why totally, just use false, it is strong enough on its own based on future price action, at this point a double top formation is possible as is a head and shoulders pattern. This is not to say that GLD cannot grind higher because the weekly chart looks quite strong, but the daily chart is at least posting a warning that lower prices or at least a period of consolidation may be coming to fruition in the not-so-distant future.

While I am expecting a meaningful pullback or correction at some point, I do not believe that gold is going to crash lower. In fact, I am viewing the possible correction in gold as an excellent potential long entry. Clearly traders could look to purchase GLD around the 50 period moving average on the daily chart ($133.06) and then add to the position if the neckline is tested. I do not believe that price will get to the neckline, but if it does I expect that level to hold and a new rally to take shape. Until gold gets below the 50 period moving average on the weekly chart, it remains in a technically constructive uptrend.

There are a variety of ways to purchase GLD if an equity trader wanted to leg into the trade at a variety of price targets. One strategy would be to simply accumulate partial positions at predetermined price targets. When considering entering a longer term position, investors and traders should formulate a plan and then trade that plan. Through the use of a trading plan, the trader can remove emotion from the subsequent purchase(s) while managing risk.

For those who would like to use options to acquire GLD common stock, the easiest strategy would be to sell cash secured naked puts. Secured naked puts do not require significant option trading experience and most option brokers will allow relatively inexperienced option traders to use this strategy. Each option contract represents 100 shares of GLD, so the trader sets aside a portion of his trading capital to purchase 100 shares of the underlying.

As a basic example, if a trader sold a cash secured January 133 put the trader would be required to have the appropriate cash in the account to purchase 100 shares of GLD at $133/share. So in order to have the put totally secured, the trader in this example would need $13,300 to fulfill the required capital obligation. For a more speculative trader that was looking to collect option premium based solely on time decay (Theta) and had no intention of owning common stock, margin encumbrance would be required. Most option brokers will demand that option traders be able to post 15-20% of the total obligation (Reg T) and will allow more experienced option traders to use margin in order to cover the remaining portion. Traders using portfolio margin can use this strategy to add income to their portfolio without tying up a significant portion of their trading capital.

Based on the weekly chart listed above, the target support areas are around $133/share and $130/share respectively. We will assume the trader wanted to purchase 100 shares at each price point. The trader in this example could sell 1 GLD January 133 Put and 1 GLD January 130 Put. Based on current prices, the trader would receive a credit of $235 for the GLD January 133 Put and a credit of $139 for the GLD January 130 put. Total credit on this trade would be around $374 not including commissions. If GLD does not sell off and continues to rally, the trader has the potential to collect a large portion of option premium from the two cash secured puts that he sold. In this case, the maximum gain would be the total credit received of $374 at expiration if the trader did not get assigned GLD common stock.

It is critically important to understand that there is significant risk in this trade as the theoretical loss would be over $26,000 assuming that GLD were to go to 0 and the trader did not close out the position. Clearly gold is not likely to be worthless, and the odds of losing $26,000 are slim to none however it is theoretically possible. If the trader in the example gets assigned the stock he still gets to keep the option premium for which he sold the puts for which was $374. Since he was purchasing 200 shares of GLD, his total cost would be reduced by $1.87 a share (374 / 200 = 1.87). The average price he would pay for 200 shares of stock would be $131.50/share (133+130 / 2 = 131.50), thus his actual price per share would be $129.63 (131.50 – 1.87 = 129.63).

The profit engine for the naked puts is time decay (Theta). Volatility and price risk exist and would become reality if a massive overnight sell off in gold took place. However, if the trade operated as is custom in traditional market conditions the option trader in this case either will earn a portion or potentially all of the premium he received for selling the puts or he will be assigned 200 shares of GLD with a total basis of $129.63. If the trader wishes to own 200 shares of GLD and has the capital to purchase the common stock, this is an excellent way to develop a trading plan that takes advantage of support levels and remains profitable if GLD continues higher.

Is The Herd Trading Gold & SP500?

2010-12-09T18:47:00.000+07:00

Over the past 2 weeks we have seen the market sentiment change three times from extreme bullish to bearish and back to bullish as of today. Normally we don’t see the herd (average Joe) switch trading directions this quickly. Over the past 10 years I found that the average time for the herd to reach an extreme bullish or bearish bias takes between 4-6 weeks in length. It is this herd mentality which makes for some excellent trend trading opportunities. But with the quantitative easing, thinner traded market, and lack of trading participants (smaller herd) I find everyone is ready to change directions at the drop of a hat.

The old school traders/investors who don’t use real-time data or charts, and who dabbled in stock picks, and options trades here and there have mostly exited the trading arena from frustration or losing to much money. This group accounted for a decent chuck of liquidity in the market and was also the slowest of the herd to change directions.

The new school, today’s smaller herd is much more aggressive and quicker to act on market gyrations. I think this is because the only people left in the market are those who make a living pulling money from the market and those who feel they are really close to mastering the stock market. It is these individuals who are using trading platforms with real-time data, charts and scanners to help get a pulse on the market so they can change directions when the big boys do. I feel this is the reason why the market is able to turn on a dime one week to another over the past 8 months… The easy prey (novice and delayed data traders) are few and far between and the fight to take money for other educated traders seems to be getting a little more interesting to say the least.

Anyways, enough about the herd already…

It’s been an interesting week thus far with stocks and commodities. The week started with a large gap up only for strong selling volume to step in and reverse direction the following day. It is this negative price action that starts to put fear into the market triggering a downward thrust in the market. During an up trend which we are in now, I look for these bearish chart patterns to form as they tend to trigger more selling the following days which cleanses the market of weak positions. Once a certain level of traders have been shaken out of their positions and are entering positions in order to take advantage of a falling market, that’s when we get the next rally, catching the majority of traders off guard as they panic to buy back their short positions. It’s this short covering which sparks a strong multi day rally and kicks off the new leg up in the market.

Currently we getting some mixed signals. The market sentiment is the most bullish it has been since 2007, just a little higher than the Jan & March highs this year. This makes me step back and think twice about taking any sizable long positions. Any day now the market could roll over. Another bearish signal is the fact that we just had a very strong reversal day for stocks and metals to the down side. That typically leads to more selling.

But if we look at the positive side of things, the trend is still up, this is typically a strong time for stocks as we go into Christmas/Holiday season, also the market breadth is really strong with the number of stocks hitting new highs has really taking off.

SP500 – Daily Chart

Below you can see the reversal candles along with short term and intermediate support levels. Although the market sentiment is screaming a correction is near, we must realize that sentiment can remain at this level for an extended period of time while the market continues to trend. This is one of the reasons why we say “The Trend Is Our Friend”.

I am hoping for a pullback and would like to see market sentiment shift enough on an intraday basis to give us a low risk entry point.

Gold – Daily Chart

A reversal candle is seen as a sell signal or a profit taking pattern. Short term aggressive trades use these to lock in quick price movements. With so many traders watching gold, it caused a flood of sell orders to push gold down today.

Mid-Week Conclusion:

In short, each time we see some decent selling in the market its get bought back up. Today was another perfect example as we had an early morning sell off, then a light volume rally for the second half of the session and a end of day short squeeze during the last 30 minutes. Gold has pulled back to the first short term support level. Because of the large following in gold I would like to see if there will be another day of follow through selling before possibly looking to take a trade.

The SP 500 and Gold are in the last stages of the rally from July

2010-12-07T16:05:00.002+07:00

David Banister- www.MarketTrendForecast.com

The Elliott Wave patterns that I use to forecast movements ahead of time in the SP 500 and Gold for my subscribers have been textbook perfect for quite some time. We can go back to the March 2009 lows and clearly identify 5 waves up to the 13 month initial rally high in April of this year. This was followed by a clear ABC wave 2 pattern to the 1010 lows on July 1^st. Right now, the SP 500 is in wave 5 up since July 1^st, and that means this is a terminal wave underway before a good sized correction ensues.

Investors should expect the SP 500 to rally up to 1285 as a minimal upside target, with the market likely peaking in the Mid January 2011 period prior to a new correction pattern. That correction will take the markets down to the 1150-1180 ranges more than likely from the January highs and knock the sentiment levels back to bearish before the next big advance. Below is where I see the current wave patterns, and as you can see, this is the 5^th and final wave stage of the advance. Ride it up, but lighten up as we approach my figures is my advice. Subscribers to my TMTF service have been riding this stage of the bull long since early July, and we keep them updated every week on the action.

Gold has also completed it’s 4^th wave corrective pattern at $1331 per ounce recently, and as I have forecasted recently should continue it’s upward trajectory to about $1480-$1525 before a good sized correction will ensue. Gold bottomed this summer in a classic wave 2 correction at $1155 per ounce, which was a 50% Fibonacci re-tracement of the rally up to $1225 from $1040. My objectives are for this pattern to complete around the same time as the SP 500 peak in Mid January as well. Downside objectives from there are likely to be to the $1310 per ounce range from the $1480-$1525 peaks, but more on that as we approach. I do not like to get too far ahead of myself in my projections, taking it one leg and pivot at a time.

If you’d like to be consistently ahead of the major market and precious metals moves and profit from that positioning, then consider subscribing today. Visit www.MarketTrendForecast.com for the details and a coupon to subscribe.

THE S&P, GOLD, AND OIL REMAIN RANGE BOUND

2010-12-04T08:34:00.000+07:00

Pre-Market trading on Friday morning was wild as the S&P 500 did not react well to the latest jobs report. Sellers stepped in and pushed down the e-mini contract by over 10 points in less than 15 minutes which is a pretty drastic move. It is critical to note that before the jobs announcement, the S&P 500 had put in a new high in the pre-market drawing in bulls and leaving many of them trapped. Today’s price action will be interesting as Fridays are usually pretty quiet.

At this point in time, the S&P 500 and most of the underlying sectors are in an extremely overbought condition. While the pullback taking place Friday morning seems significant, for bulls a pullback would be healthy by potentially allowing the S&P to regroup to challenge new highs for the year. From a bearish standpoint, the S&P 1225 level was the last stand to keep this rally in check. As has been the case for the past few weeks, price action continues to maintain a range on the S&P 500 between 1170 and 1225. Until either level is broken with strong confirming volume and/or a daily close well above/below the key support/resistance levels, we will likely remain range bound.

S&P-500 – SPX

GOLD – GLD

Gold futures moved inversely when compared to the S&P 500. The poorly received unemployment report sent gold surging higher. Previous analysis has indicated a head and shoulders formation on gold’s daily chart, however if gold’s price continues higher it may challenge recent highs and overhead resistance. With continued concerns in Europe and the pullback that we have seen the past several days in the U.S. Dollar, it would not be shocking to see gold continue to rally to new highs. However, at this point in time there really is no low risk trading setup for those that are sitting on the sidelines.

Oil – USO

Light sweet crude oil futures sold off when the unemployment data was released. However, recent price action has suggested that oil may test the top end of the trading range. As stated before, long term I expect oil to break higher, but until we get a confirmation supported with strong volume I will remain skeptical. If oil were to test the recent highs it should be met with strong resistance, but if that resistance fails to keep oil prices in check it is likely that oil will breakout and could potentially test $100/barrel sometime in 2011, if not sooner. Time will tell, but if crude oil breaks out of the long term base it is in prices will like rise quickly.

30 Year Treasury – TLT

The 30 Year Treasury Bond futures soared after the dismal jobs report. As of the writing of this article it appeared that treasuries are beginning to top out this morning. While a bounce is likely due to the oversold nature of treasuries, they remain under their 50 period moving average on the daily chart. As long as the price remains beneath the 50 period moving average the 30 year treasury bond will continue to be under selling pressure. If interest rates continue their ascent eventually it would put downward pressure on the economy, particularly if rates were to move significantly higher in a short period of time. While a bounce at some point is likely, being long treasuries for more than a trade puts an investor on the wrong side of the price action. Keep a close eye on treasuries because rising rates will matter at some point.

TBT Trade

With the 30 year treasury bond trading below its 50 period moving average, I thought I would outline a strategy which does incur significant risk, but offers an excellent income opportunity. While I would never advocate selling or buying options naked for beginners, selling equity backed puts naked is an excellent strategy to generate income. Additionally, this strategy should be used on an underlying that an options trader would not mind actually owning.

On Tuesday my newsletter at OptionsTradingSignals.com will be launching and this type of trade will likely never be discussed or recommended. However, it is critical for option traders to be aware of all of the trading strategies that options present. The example below is not a recommendation, but simply an example of how this type of trade works and how it can be utilized in a trader’s portfolio. First of all, it is critical to realize that Regulation T dictates that option traders require 10-20% equity to sell a put option naked.

As an example, if TBT were trading at $35/share 100 shares would cost $3,500. To have appropriate equity, an options trader would need as much as $700 in cash to sell 1 put contract naked. However those requirements are different among the various options brokers as they typically have varying degrees of margin requirements which are based on the experience level of the trader and the trader’s capital position.

As stated previously, this strategy should only be used on an underlying that an option trader would be willing to own directly. The reason being if an option trader gets assigned he can purchase the stock and potentially start a covered call campaign while he waits for prices to increase. With the 30 year treasury bond futures being well below their 50 period moving average, owning TBT at a lower price makes sense, particularly when the option trader collects a premium further reducing the cost of purchasing the common stock.

A general trading rule would be to sell naked puts about 5-6 weeks before expiration. A trader would want to look for a put option with a delta around 20. In most market conditions, this would give the trader a high degree of probability that the options will expire worthless producing income for the trader. If possible, using this strategy and incorporating support levels is also warranted. If a strike is near long term support, selling strikes at a lower price can result in some nice income producing opportunities and the potential of owning the stock at a much lower price.

If a trader is using this strategy and does not intend to be assigned the stock, stop orders are an absolute must. This strategy does expose itself to overnight risk, but when a put is sold unlike its cousin the naked call there is a max loss on each contract. The max loss would take place if the stock were to trade to zero and remain there. While this is highly unlikely, it is theoretically possible.

As stated above, this is a high risk strategy but option traders looking to own a specific underlying stock can use this trade construction to further reduce the cost of owning the stock or create additional income for their portfolio. In closing, if managed appropriately, this type of trade can produce some great returns while allowing an option trader the ability to own common stock at a lower price.

Broad Market Reversal – Better Hold On To Your Hat!

2010-12-04T02:16:00.000+07:00

This had been an exiting week for traders as the equities market was on a verge of a major sell off. Fortunately, we were watching the market very closely and saw the sentiment and market internals shift shortly after a new low was set last week. That was an early warning for us that a trend reversal to the upside could happen at any hour or day this week.

Wednesday and Thursday’s rallies were on solid volume and the market internal indicators along with market breadth were strong also. There has been a large surge of new highs across the board on the NYSE, NASDAQ and AMEX. These numbers tell me that it’s not just one sector moving the market; instead it’s a broad market advance (institutional buying).

While I don’t typically try to pick major tops or bottoms because of the added risks and lower probability of winning trades, I do tend to spot them forming a few days in advance allowing me to tighten stops and take some profits on positions.

Trend reversals typically have large violent moves near the beginning and end of their life cycle making things not only tougher to trade but potentially more costly. Once I see a trend confirmed with moving averages, volume, and sentiment along with market breadth that’s when I start looking to take positions on pauses or pullbacks to support zones. This greatly increases the odds of winning/making money from the market. There are some really great Options Trading Strategies for taking advantage of these volatility changes in the market which you can get at OptionsTradingSignals.com

SPY Daily Chart:
As you can see the market has clearly broken to the upside above key moving averages after finding support at the 50 day moving average. This rally has some solid volume behind it which I like to see also.

The first 3-4 days of a trend reversal generally post some give moves but after that initial thrust expect a pause or pullback to happen.

SPY 60 Minute Intraday Chart:
We were lucky enough to take profits on our inverse SP500 trade as the market started to give us mixed signals of a possible rally. A couple days later on Nov 26th we saw a major shift within the market sentiment preventing us from shorting the market again.

Two days later the broad market gapped higher triggering protective stops/short covering sparking a fierce two day rally which took the market up to a major resistance level. I do feel as though the market is going higher, but right now, everything is WAY over bought and trading at resistance. Even if the market moves higher for another 2-3 days and breaks this resistance level, it will most likely have a pause, or pullback as it regains energy for another thrust higher.

Mid-Week Trading Conclusion:
In short, it looks as though the trend is now up and the Christmas rally could be gearing up for a good one!

Get ebook here

Broad Market Reversal – Better Hold On To Your Hat!

2010-12-03T08:04:00.002+07:00

The first 3-4 days of a trend reversal generally post some give moves but after that initial thrust expect a pause or pullback to happen.

Mid-Week Trading Conclusion:
In short, it looks as though the trend is now up and the Christmas rally could be gearing up for a good one!

THE S&P 500, GOLD, OIL, & THE BANKS – WHAT A CONUNDRUM

2010-12-02T06:18:00.000+07:00

Sellers were in control most of the trading session on Tuesday, however an overnight buying surge pushed the S&P 500 back up to overhead resistance as the directional battle raged on between the bulls and the bears. For over a week we have had relatively choppy trading as the S&P 500 has remained in a tight range between the 20 and 50 period moving averages. By the open Wednesday, the U.S. financial markets demonstrated their resiliency yet again. It is critical to note that we received our first and second official tests of the 50 period moving average on the S&P 500 daily chart.

While recent analysis has offered that prices are consolidating and that a significant move is likely to play out, it is too early to be making market prognostications about what is to come. However, the S&P 500 is leaving us with a few clues about potential direction which is apparent through the lens of technical analysis. While the 50 period moving average was tested both Monday and Tuesday, price action early Wednesday morning was extremely bullish on the heals of a solid ADP employment report and a slight pullback in the U.S. Dollar. As stated in my previous analysis, we will remain in a technical uptrend until we get sustained prices below the 50 period moving average on the daily chart of the S&P 500.

As most veteran traders realize, key price levels weaken each time they are tested until eventually they break. Time and price will line up and we will either have a strong sell-off, or the equities market will bounce and test the recent highs. Now that we have had a second test of the 50 period moving average, the 3rd test may see the support level give way to lower prices. If prices break below recent support and we lose the 50 period moving average, it is likely price will correct to the S&P 1150 level with the possibility of testing the 200 period moving average. In contrast, should the S&P 500 price breakout over recent resistance we could challenge new highs. At this point in time, price action should be monitored closely to see how the S&P 500 handles these key levels.

S&P 500

Gold

Gold and silver had strong advances higher on Monday and Tuesday with the U.S. Dollar continuing its rally. While not a frequent occurrence, a simultaneous rally in the U.S. Dollar and precious metals is typically the result of abnormal market conditions. The crisis unfolding in Europe was likely the force behind the mutual rally in precious metals and the U.S. Dollar as central bankers and asset managers fled the Euro seeking safe havens. The dollar continues to sustain bullish price action and has the potential to go much higher than many traders and money managers may expect.

Gold and silver have had monster sized runs and appear to be consolidating before making their next move. While the ominous head-and-shoulders pattern is apparent on GLD’s daily chart, the potentially more negative aspect regarding the metals is their widespread acceptance as a safe investment by the retail crowd. While gold and silver could continue higher, at some point it would be healthy to see a pullback and with so many retail investors long gold and silver, a strong correction would wash out emotional bullish traders before ultimately heading higher.

At this point, I am sitting back and watching the price action unfold, but should the neckline of the head and shoulders pattern break to the downside, I will likely get involved with some downside exposure.

XLF (Financials)

U.S. banks have been under pressure as a variety of headwinds faces the sector. Most of the banking concerns of which traders are aware are increased regulation, foreclosure nightmares, capital formation issues, and commercial real estate and development problems. Has anyone given any thought to whether U.S. Banks have any exposure to the European banking/sovereign fallout? It is without question there is exposure, the more appropriate question should be who is exposed, and how much risk did they take on? Since we will likely not prospectively know who is exposed until price action confirms their identity, the safest way to play that potential risk is through trading the financial ETF XLF.

Through the use of this ETF, traders can broaden their horizon and focus more on the price action without worrying about which specific banks are exposed to heightened risk. XLF has already broken down below its 50 period moving average on the daily chart. While a bounce is likely, if the 50 or 20 period moving average hold XLF down, it is likely we will see prices roll over and XLF could potentially challenge new lows. Should this take place, the S&P 500 will likely follow in the XLF’s footsteps.

USO (Oil)

Traders moved oil prices higher on Monday, but Tuesday saw market participants take profits and push USO lower by the closing bell. USO, much like gold and silver is a mixed bag when looking at the daily chart. On one hand, we can see that Monday’s action pushed prices above the 20 period moving average. During intra-day trading on Tuesday, price tested the 20 period moving average and support held firm. Wednesday morning energy traders pushed oil higher, but as of the writing of this article oil was trading at resistance. While there are clearly bullish signals on the USO daily chart, USO appears to be forming a head and shoulders pattern similar to gold. With conflicting technical information, sitting on the sidelines and waiting for price and direction to be confirmed is likely a sound decision, at least that is the way I am playing it.

Goldman Sachs

Goldman Sachs (GS) is offering two interesting trading setups that option traders could use which have a different directional bias. The daily chart places Goldman in a descending channel and provides traders who want to get short with defined risk. Those who remain bullish could get long and use the 50 period moving average as a stop. At this stage in the December option expiration cycle, utilizing time decay (Theta) as either a profit engine or a way to reduce the cost of a spread is a sound trading strategy.

With less than 3 weeks until expiration, time decay (Theta) accelerates rapidly on its inevitable path to 0 at expiration. This process increases dramatically the final two weeks leading up to expiration. Option traders that utilize time decay (Theta) to reduce the cost of a spread or as the primary profit engine of a trade construction (credit trades) are capitalizing on an inevitability.

Clearly there are inherent risks such as an increase in implied volatility, but without question at option expiration the time value of options will be reduced to 0. Time decay (Theta) and implied volatility are the two most likely culprits as to why novice option traders consistently lose money trading options. Understanding a few basic principles regarding option Greeks is critical in order to produce profits. The daily chart of Goldman Sachs is shown below.

Those who are bullish with regard to Goldman Sachs could use a call vertical (bull call spread) with the following strikes:

Long 1 December 160 Call Contract
Short 1 December 165 Call Contract

Through the use of a hard stop well below the 50 period moving average, an option trader could define his risk while having a quality risk / reward trade. The maximum loss on this trade would be less than $180 per leg while the maximum gain would be slightly over $320 not including commissions as of Wednesday morning. The use of a hard stop would reduce risk further and could potentially lead to a nice profit in days to come.

For traders who want to press the downside, a put vertical (bear put spread) could be used with a contingent stop around the $161/share price level. The trading setup is as follows:

Long 1 December 160 Put Contract
Short 1 December 155 Put Contract

The maximum loss per side for this trade would be around $230 while the maximum gain is $270 as of the Wednesday morning. Similarly to the call vertical spread listed above, the use of the contingent stop reduces the intra-day risk even further. While these setups are about as basic as it gets regarding option trading, they can really produce some nice profits. Again, these are not recommendations, but simply an example of the profitability that options can add to your trading if they are used appropriately.

In closing, we are seeing a lot of head and shoulders patterns developing in a variety of trading vehicles. While these patterns can mean substantial downside is ahead, there is always the potential that they could fail. Failed patterns result in fast, potentially devastating moves. If the head and shoulders patterns we are seeing in the S&P 500, gold, and oil fail a fast paced rally will likely unfold. In contrast, if the patterns play out a nasty sell-off could take place. At this point in time, a significant move is likely to unfold, but as usual which direction prices will eventually go remains unknown.

Gold will head to 1480-1525 before a major correction

2010-12-01T23:00:00.001+07:00

David Banister- www.MarketTrendForecast.com

Excerpted from TMTF November 28th:
Gold has been consolidating other than a spike to an intermediate wave 3 top of $1424, for about 7 weeks or so now. It’s typical to see Fibonacci periods of time as part of consolidations whether it be an individual stock or a precious metal in this case. Gold was overbought at the $1425 pivot highs a few weeks ago, and that terminated what I label a “wave 3″ pattern. This led us into a 4th wave corrective pattern which we remain in now. My worst case pivot low is expected at $1,321 and so far we have seen $1,331 an ounce and then an ensuing bounce to $1370 ranges.

In the intermediate term then, I’m looking for further consolidation likely for another week or so followed by a breakout over $1425 leading to my objectives of $1480-$1525 to complete the entire rally from the $1040 lows in February of this year. Many are starting to get bearish on Gold and Silver up here, and to me that is bullish and indicative of “4th wave mentality”. In a 4th wave, there is growing bearish sentiment, but not so much as to topple the bull structure.

To wit, last week in my ATP service I recommended a brand new Core Position in a Gold,Silver stockand it rallied as much as 40% intra-week at it’s highs. We are in a super bull market for Gold stocks as I outlined in August of 2009, and we have another four years left to go. I’m seeing alot of amazing chart patterns in the Junior space that are in relentless climbs. Owning the the explorers that are finding the Gold is how best to take advantage of the remaining four years. At ATP, we are exposed to Rare Earths, Silver, Gold, and Oil and Gas related plays in our Core Positions. Make sure you own hard assets and precious metals resources one way or another. My silver forecast in late August was basically predicated on the small investor swarming into the Silver market to buy up coins, look for that to continue and Silver to be over $30 in the not too distant future.

Below is my updated Gold forecast using a weekly chart, remember to Keep it Simple!

Gold/Silver – Controlling Your Trades, Money & Emotions

2010-11-30T04:39:00.002+07:00

Last week we had typical pre-holiday light volume trading going into US Thanksgiving. The previous week I warned every one to trade with extreme caution because of the light volume and the fact that the market is on the verge of a sizable drop for both stocks and commodities. Any price action could not be taken seriously because of the light volume. We will not know until later this coming week what the big money wants to do… Buy or Sell, also what the manipulators will do… Seems like there are a lot of wild cards out there with Europe issues and both unemployment and payroll numbers out on Friday morning.

Below are a few charts showing my intermediate term outlook for gold and silver.

Gold & Silver Futures – Daily Chart
You can see both metal are showing a possible reversal head and shoulders pattern. While they have yet to confirm and close below the neck line we must be aware of this pattern and the risk/potential it provides us with. Both metals are still in an uptrend but showing signs of weakness.

US Dollar Index – Weekly Chart
This chart is not really that helpful for trading stocks, commodities or options right now but I wanted to post it because it allows me to show you how I analyze the market and my trades.

As you can see, the past 3 weeks have been in a strong uptrend reaching the first resistance level. The point of this chart is to show you that if you step out to the next longer time frame you can get a solid feeling of where an investment will find major support and resistance levels. Any investment not matter if it’s a stock, commodity or currency, if the price is trading in the middle of a large range like this chart you should not be taking large positions because it almost becomes a 50/50 bet on the market which is not a good winning strategy unless you are very experienced at managing your trades and money.

If you are going to trade then you want to focus on the underlying trend and you do that by looking at the next larger time frame. For example: if you focus on trading the daily chart, then you must step back each week and review the weekly chart to be sure you are trading with the underlying trend which is up for the dollar right now.

Weekend Trading Ideas:
Tuesday morning we saw the SP500 gap lower and continue to sell off. Traders started panicking out of their long positions and we could see it using the intraday market internals charts, which I cover each morning in the pre-market trading videos. Me being a contrarian (buying into market fear, selling into market strength) I used that high level of fear in the market along with the expected light volume holiday week ahead as an excuse to book profits near the lows on SP500 using the SDS bear fund allowing us to profit from the falling market. I feel we are going to have some crazy moves on the markets going into year end and it should be a lot of fun if done correctly.

Trading in general is a very difficult task especially if you are doing it for a living and planning on using your monthly income to pay bills, salaries etc… We all know the stress which comes with trading and if do not have a solid trading strategy, rules and cannot properly manage yourself (emotions) then you are most likely running into problems like over-trading, getting shaken out of trades easily, and taking bigger risks than your account can handle. Each of these cause more traders to blow up their accounts and big up on trading.

I am giving away my book on how you can control your trades, money and emotions. This short and to the point guide is full of my trading techniques, tips and thoughts which will help you get a handle of your emotions turning the market noise into music.

Download Book: http://www.thegoldandoilguy.com/trade-money-emotions.php

THE S&P 500, GOLD, OIL, AND THE BANKS

2010-11-25T17:54:00.001+07:00

Stocks were back on sale Tuesday when the S&P 500 suffered more than a 1.40% decline by the closing bell. Some market prognosticators pointed their fingers at the dollar, other pointed at the Korean situation, and still others had their eyes fixed on Ireland and the Eurozone as potential causes for the sharp selloff. The S&P 500 is currently oversold on the short term chart and either a bounce or period of consolidation is likely. At this point, chasing stocks in either direction will only satisfy the desires of the smart money, who will likely blow these anticipatory traders into trading fodder in coming weeks.

Right now, patience is a must. The day before Thanksgiving is synonymous for light volume as are most days preceding a holiday. Thanksgiving leads us into the holiday season which typically is characterized by low volume until after the New Year. As most traders know, when volume is light the market typically has a positive bias. I would not be shocked to see U.S. stocks trading higher Wednesday and/or Friday.

While the short term charts are oversold, the longer term charts continue to have a technical bias to the upside assuming the 50 period moving average does not get violated. Time will be the final arbiter as to whether this correction is relatively mild before stocks continue higher, or if this is the beginning of a larger correction.

S&P 500 (SPX Daily)

Gold (GLD Daily)

At this point in time, gold is forming a possible head and shoulders pattern on the daily chart. While it is too early to determine if the pattern will play out, if the expected price action confirms the head and shoulders top then the measured move would indicate price levels around the GLD 120-122 area will likely be revisited. Currently gold and the GLD trading ETFare not offering a great risk/reward entry from a long or short perspective, and even if it were I would simply watch the action unfold until we get confirmation that the head and shoulders pattern is going to either be confirmed or fail. Caution is warranted and risk remains high.

Oil (USO Weekly)

USO has been in a consolidating pattern for well over a year and it continues to build this monster base between the 32 – 42 price levels. When this base is finally broken, a major move in oil will likely be underway. I am expecting that price will get close or test the bottom of the range for an outstanding low risk long entry using the bottom of the base as a backstop for risk definition. It is hard to say where price is heading in the short term, but from a fundamental perspective oil has some positive bias with increasing demand coming from emerging markets and a slowdown in future supply.

The Banks (XLF Daily)

Recently the XLF ETF (the financials) had a breakout of a long-term consolidation pattern which has failed. With that failure, the broader markets have sold off from recent highs. If the XLF and KRE continue to be under pressure, it is unlikely that the broader market as a whole will continue higher. It is critical for traders to follow the financial sector because the broad markets will go nowhere without their participation.

Like it or not, our financial complex has to be healthy in order for our economy to improve with any lasting effect. If banks are not lending, then it is safe to say the economy is not expanding at a fast pace. If the banks are not profitable or are not consistently growing their revenues, this would again be a negative indicator regarding economic growth.

There are a lot of analysts who are showing concerns over future profitability amid countless issues which include mortgage defaults, over exposure to commercial real estate and development loans, and potential prosecution in lieu of the way the large money-center banks handled foreclosures. Additionally, companies like PIMCO and other investment firms are attempting to return the mortgages they bought back to the banks through legal action which could lead to further losses. While the outlook is certainly not great, I would not expect any powerful rallies if financials are not following along.

Conclusion

With the shortened holiday week, I will not be offering an option trading setup. I am simply watching the price action and sitting in cash. When volume is this light, the markets generally have an upward bias and with the large selling volume we witnessed on Tuesday, a bounce is likely overdue. Until the S&P 500 gives up the 50 period moving average, we remain in a technically constructive pullback which could potentially lead to higher prices. If we get a daily close on the S&P below the 50 period moving average, all bets are off.

In closing, I hope this find you well and I wish all of you and your families a safe and Happy Thanksgiving!