April 20, 2013

Logical Market Update: Weekend Edition – Economy Talk – Day Trading vs. Position Trading – Seriously!

Weekend Edition – Economy Talk – Day Trading vs. Position Trading – Seriously! – What is Next for Precious Metals  


Economy Talk


I saw a headline on Friday that basically stated that U.S. investors are increasingly becoming concerned that the economic recovery is stalling.  This struck me as odd against the constant back drop of being told that the U.S. economy remains in recovery and is getting stronger, that the housing slump is “finally” behind us with real estate prices on the up swing and construction going “full tilt boogey” in most major metro areas in the country, that interest rates will remain low for the foreseeable future and thus contain and control the “evil demon” inflation. 


Being the contrarian that I am, the analyst in me usually sees a top being put in place just about the time the majority is acknowledging the rally.  Granted I did not expect the current economic expansion and recovery, which began in 2009, to resemble in its intensity or dynamic nature the incredible finish to the last expansion witnessed from about 1981 to 2000.  An expansion that began in 1932 and included recessions both long and short – housing boom and busts both regional and national – periods of inflation and deflation – interest rates soaring and falling – world currencies experiencing hyperinflation and disastrous collapses – new currencies born to replace numerous others.  
Despite the economic collapse and the probability that an even greater event on a larger scale is probable to begin within the next 5 to 10 years most people continue to choose denial over preparedness. 

Take a look at the chart below of the DJIA – (the period of time is 1900 to present)



The period of expansion from 1932 to 1999 was corrected over a period of 10 years climaxing with the global economic collapse of 2008 – 2009.  From that bottom in early March 2009 the current economic expansion began.  Conventional wisdom theory would tell us that based on history the global economies will just keep on chugging higher and higher and higher.  Reality tells us different and excess in any form is usually dealt with by a “bursting of the bubble.” 


On an Elliott Wave basis, I believe the current advance is a 5th wave.  Break it down as follows –

  • Wave 1 is from approximately 1900 to 1929
  • Wave 2 is from 1929 to 1932
  • Wave 3 is from 1932 to 1999
  • Wave 4 is from 2000 to 2009
  • Wave 5 began in 2009 and I anticipate it unfolding over a period of 8 to 15 years.


The Status Quo is Changing


Here is an important subtlety about economics – when considering the demographic pyramid (the poor being at the bottom of the pyramid) and disposable income within a developing economy (India, China, Mexico, Indonesia) versus a developed economy (United States & Canada, Europe, Japan, Australia) to view an increase in disposable income from a commodity consumption point of view (an increased demand for commodities) when looking at emerging economies.  Developed economies on the other hand tend to spend their increased wealth on services.  Poorer countries tend to increase the commodity consumption of their households. An increase in energy consumption would be expected.  This ultimately leads to a disproportionate increase in commodity consumption. 


Add to this picture the credit conditions (debt level increases) that have been brewing for the last couple of decades within the developed global economies.  Emerging economies are far less indebted than developed economies.  Here the ultimate result is likely to be a major shift in economic leadership.  Currently that role is firmly in the hands of the United States, Europe and Japan.  The change will have a much more dramatic impact on commodities than what has been seen thus far.  This type of change has an impact that spreads over a period of perhaps 12 years not 12 months creating a longer lasting increase in price volatility as supply and demand as well as speculative trading ebbs and flows. 


Day Trading vs. Position Trading

As much as I have written recently regarding the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading I haven’t as many of my friends believe gone over to the Dark Side.  On the contrary, it is a technical analysis tool that I learned over 25 years ago, the Elliott Wave Principle that shows me the ultimate highs are not in yet even if the markets throw a 10 to 20% correction our way over the next month or so. 

The use of overbought/oversold indicators and momentum oscillators indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or ”bear trap” forms.  It is also where the market will continue to move to find the maximum volume where the trapped traders or investors are forced out of their positions.

A recent report showed that in the first quarter of 2013 there was a $74 billion inflow into equity funds as a longer –term upward pressure continues to thrive on those that don’t want to be left behind and “miss the rally.”    Balance this against the many who look at the shorter-term picture and have been preparing for the “sell-off.” 

My longer-term analysis continues to show that the “mother” of all bull traps is in the making and will continue to pull in more unsuspecting late comers to the party who unknowingly are blinded by conventional wisdom theory and can’t see that the bull is very old and will ultimately give up the ghost.  These poor investors will be caught like deer in the headlights as a significant correction slaps them down.  But don’t be fooled the market gods will delve out additional pain over the short-term and trap the bears with a few more thrusts to the upside. 


I continue to advocate switching strategies if necessary and focusing on day trading and less if at all on position trading.  I continue to recommend 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. 


Precious Metals

To say that the precious metals markets have been volatile as of late would be an understatement.  I continue to view the entire downward move from the all time highs as corrective.  Therefore I think precious metals will reverse the trend and begin to head higher and I think sooner rather than later. 


Even though, the precious metals are traded in different currencies it is the U.S. dollar that all precious metals are denominated in.  Presently, it would appear that the developed economies of the world are in a war of competitive devaluation.  The U.S. is creating dollars with impunity.  The Japanese are determined to take the yen down, which leaves the European community in a position where it must respond and then of course that would lead to additional responses from the U.S., Japan as the game of musical chairs continues. 


Precious metals are a generally accepted medium of exchange that does not have domestic devaluation on a political constitutional basis.  Precious metals are denominated in U.S. dollars, which happen to be in what some would consider a “slow-motion” multiple vehicle wreck.  This will benefit (in nominal terms) the price of gold as well as most other precious metals.  In fact the current blind faith (confidence) in the equity markets today is one “hatched” of U.S. dollar liquidity.  The FED and other global Central Banks have created a comfort level amongst the population that treating the “crisis” issue as one of liquidity and by adding trillions of dollars or Euros or Yen that the solvency issue is being solved.  However, when the dollar and debt bubbles finally reach heights that can no longer be ignored by the populations the precious metals complex will increasingly be favored over something that can’t be “printed.”   This will include many commodities including natural resources as well. 


Near-Term Expectations

Gold has held higher the last four sessions.  Thus far resistance at 1423 has contained buying, as the trading picture has not changed.  I expect gold to continue to trade with increased volatility as the downside picks up again.  Continue to look for 1423 to contain upside before this metal puts in a likely break below 1300.  As previously discussed it is going to take some time before stability and a sustained reverse of direction take place, but it is getting closer. 


Silver also remains unchanged for the short-term outlook.  I continue to expect the market to be held below 24.25 before joining gold in another leg down.  I suspect that 22 will be broken with next stronger support not available until the (dare I say) 18 to 20 area. 


The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in Gold and Silver futures, GLD and SLV – gold and silver ETF’s and several mining stocks.