June 26, 2013

Logical Market Update: Precious Metals Hammered Lower – Negative Momentum Getting Extreme

Gold & Silver Hammered Lower- Negative Momentum Getting Extreme

Gold and silver dropped to new two-year and nearly three-year lows. The futures markets have again seen the liquidation of “weak-handed” longs and continued technical short selling as the market reacts to the prospect of a stronger U.S. economy triggering the Federal Reserve to begin to scale back its monetary stimulus program. Tuesday’s economic data strengthened the argument of the FED weaning the economy from the easy money policies that have supported a continued bullish stance on the raw commodities sector including precious metals.

Adding fuel to the shorts argument was the continuing “cash crunch” in China further weakening demand for gold and the government of India placing additional duties on the import of gold. China remains the center of attention though as the world’s second largest economy grapples with its own growing pains.

Both gold and silver have dropped into extreme oversold readings (monthly charts), which supports the bear market reaching a bottom. As is so often the case, a market is the most bearish at the bottom or most bullish at the top (price) – just before things turn around. If you believe the old trading adage that “the majority of traders are wrong most of the time” and currently it appears that the majority of the gold and silver traders are bearish then a strong argument can be made from a market psychology perspective that the bottom must be close.

Gold (futures – monthly chart)

The break below $1300 and subsequent break below $1250 have cleared the path for a likely test of the $1155 area, which is a short $75 from current levels. If the bears continue to press through support at $1155 it would raise the potential for the decline to reach $950 before all is said and done. Resistance of any strength should be found at the $1300 level. Note the stochastic oscillator is registering extreme oversold. With the majority of traders appearing to be short I would suspect that downside as well as any turn to be very volatile under increased volume. Day trading remains my preferred trading strategy as many of the moves start during either in Asian or European trading. The strength of the moves keeps all three DTS platforms (Hawk Scalper, Falcon Swing, and Eagle Trend) in play for now.

Silver (futures – monthly chart)

The bear market is silver also remains relentless as longs are liquidated and shorts fill in the gaps. The market is in danger of dropping back below $10 if next support at the $17.15 area doesn’t hold. Support below would be at $8.25 that is basically the starting point for the bull run that ended at $49.80 in 2011.

The stochastic oscillator is also into extreme oversold readings so I am beginning to look for signs of a market turn – which haven’t appeared yet – and I would not recommend getting in front of the pent up downside momentum in silver.

Margin requirements are high in Silver ($15,000 per contract), but the alternative for trading would be SLV (silver ETF), which trades in step with the futures and is very liquid.

Diversified Trading System

I continue to recommend as the best trading platform available to a broader range of traders from novice to expert. The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester. When implemented it allows the user to:

Immediately know the impact of parameter changes.
Automatically reads all of your DTS entries and exits
Calculates the profit/loss of each trade
Performs a wide number of essential intelligence boosting calculations instantly
Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

The last two points above are valuable tools to use. It will show you where some “tweaking” is needed to improve results through the back testing feature.

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

DJIA future (e-mini available) – Highly recommended
S&P-500 future (e-mini available) – highly recommended
Russell 2000 future (e-mini available) – highly recommended
NASDAQ 100 future (e-mini available) very highly recommended
US$/Euro futures (e-mini available) – very highly recommended
GS (Goldman Sachs) – good two way volume –
AAPL (Apple Computer) – highly recommended
GOOG (Google) – highly recommended
LNKD (LinkedIn) – solid intraday range
NFLX (Netflix) – solid intraday range
TSLA (Tesla Motors) – highly recommended
30-yr Treasury Bond future – highly recommended
10-yr Treasury Note future
TLT (Treasury Bond Long ETF)
TBT (Treasury Bond Short ETF)
Gold (futures and ETF – GLD) very active – not suitable for all traders
Silver (futures and ETF – SLV) – very active – not suitable for all traders

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