Many people try to predict market direction based on the short term action of the markets and expect a logical move one way or the other. I suppose that’s because most traders are short term traders.
One thing is for certain, markets are not logical, especially in this day when markets are manipulated by our Keynesian central planners. When I went to school to learn how to trade, short term day trades and short term swing trades were what I was taught. I think that’s because everyone wants immediate gratification.
However, as I have traded over the years, I’ve reached a level of intolerance for short term trades. The stress and frustration can be draining and sometimes overwhelming.
As a result, I plan my trades for the long term trend and then take advantage of any short term cyclical action. You have to look at the big picture first and then time your trades based on short term corrections.
Once I make a trade then I will follow it up (or down) until my trailing stop or target is triggered, then I wait for the next wave in the cycle that continues the trend.
Although I’m a technical trader, I listen to and analyze the fundamentals as well. As an example, the fundamentals show that gold and silver are extremely oversold and obviously manipulated.
Gold has been in a downtrend for the past four years, but the physical market demand for gold and silver is off the charts. In a non-manipulated world, one would think that a high demand would translate into higher prices.
But since the futures market is manipulated, you have to consider the opposing force of that manipulation. I’ve always been a gold bull because the fundamentals scream that gold and silver should be skyrocketing. This also makes me wonder how long the central banks can keep it suppressed.
We are all hoping for a break of the system and metals to skyrocket and make us all rich, but so far that hasn’t happened. But how much longer can it go on?
The MACD and Stochastic oscillators have been showing oversold conditions for weeks now in Gold. In a freely traded market, technical analysis produces much higher probabilities. But in this day of interventions and manipulations, it’s just another educated guess.
So how do you play these scenarios, when there is no consensus of direction?
Professional traders use ‘Pair’ trades and in the case of options trading, like I trade, I use a ‘Straddle’ when I’m not sure which direction the market is going.
Stocks move up, down or sideways. This means you have a 1 in 3 chance of a winning trade. But with a Straddle, you increase your odds of a winning trade by a 2 in 3 chance.
The ‘Straddle’ is non-directional. You buy a call option and a put option on the same stock with the same ‘at the money’ strike price and the same expiration date.
Options are designed to limit your risk by the cost of the options contract. So, as long as you’re not betting the farm on one trade, the most you can lose is the cost of the option contract.
But sometimes I will go one step further and place a 50% stop loss on my straddle options, so that I only lose half the cost of the losing option in a straddle situation. This also makes the winning side of the trade profitable sooner.
One other consideration is to trade the Straddle position and let the winning side run its course, close the position, and then, as the price changes direction, allow the other side to run back up.
Of course, in order to take advantage of both sides of the trade you need to have an expiration date that gives you time for both sides to move.
Ok, the Fed raised rates, now what?
Well the Fed did what everyone expected and raised rates by .25 basis points. I was expecting a significant reaction, but other than the initial knee jerk volatility up until and just after the announcement, not much has changed, so far.
However, I do believe things are going to begin to tank over the next few weeks as investors digest what just happened. The Fed tightened monetary policy at the worst possible time, when virtually every economic indicator is screaming that the economy is in free-fall.
Money velocity is at the lowest level in over 50 years.
The Baltic Dry Index is at record lows and the BLS figures are a fraud.
The World is addicted to zero interest rates and easy money. As that dries up, I expect things to get out of hand very quickly.
The stock market also shows signs of fundamental weakness, but it seems that every time the Fed hints at some sort of intervention, the markets react irrationally to the upside. The stock market is obviously overvalued, but the PPT has successfully indoctrinated the masses into believing that they are in complete control.
Now, the junk bond market is imploding and this is exactly what happened before the stock market crash in 2008. I’m of the opinion that they’ve reached the end of the road and run out of cans to kick and the technical indicators for the stock market seem to agree.
It appears we are in the midst of a crash right now and the momentum is just beginning to build up steam.
Once the masses realize that the game is over in the stock market, then we will see them pile into precious metals and eventually overpower the manipulators.
Ok, last week I mentioned that with the Fed rate hike I expected gold to get whacked and retrace for a few days while the dollar also moves up, but I think it will be temporary and rebound shortly thereafter.
If you look at the big picture, gold is still in a bear market since the peak of 2011, regardless of whether it’s been caused by intervention or not, and the next major support level is around 1005. (See below)
As gold bugs, we all want to believe that the pain is over and we’ve reached the bottom, but I’m not so sure. There hasn’t been any real strength in the rebounds to date and although, everyone says the COMEX is out of gold and the system is about to break, I’ve reached a level of pessimism about that story which has been repeated so many times over the past 4 years.
Yes, I believe we are very close to the breaking point. But I think there may be more pain to come before we see a new bull market in gold.
The global economies are imploding at the same time that COMEX is reaching its limit of physical gold for delivery. Will the collapse of the stock market coincide with the collapse of COMEX? Perhaps, but the U.S. has a tremendous amount to lose if gold skyrockets and they lose control of the fiat dollar. That’s why I think the US Treasury will do everything in its power to keep a lid on the gold price until the natural market forces simply overpower them.
There is no doubt that we are getting close to that inflection point. You can feel a sense that things are reaching critical mass, but timing is always allusive and the best way to play gold for the next bull market is either to buy and hold, or if trading options, buy Leaps. This gives you time for the markets to make their move.
As you can see in the chart above, gold needs to break the upper trend line around the 1200 level before we can consider a trend change and who knows, that could be next week or in 6 months.
Gold is due for a short term rebound from current levels, but whether it surpasses 1200 or beyond is still just speculation and hope.
So how do we trade this going forward? Gold is currently set-up for a rebound, so we have two options, first we can place a short term trade based on the current oversold position of gold and wait for the rebound to the upper trend line. You can place a trailing stop or follow the price up with hard stops and if it breaks the trend line, then hopefully were off to the races.
The second option is to make a long term Leap trade with 2017 Calls and just sit back and wait for the fireworks. Both should be winning trades, but one might be a little less stressful.
The dollar made a double top two weeks ago and I just don’t have much faith that it’s going to break that resistance line again, even with the rate hike. It’s already showing weakness and this will be good for gold going forward.
Stock Market Indices: (SPY) (QQQ)
This from Zero Hedge.
Don't Believe The Hope
Not only has breadth collapsed back to Black Mondayin overall market breadth. Yes, it's Fed week, and OPEX, but the underlying support for the Ponzi is waning rapidly.
Two days after the rate hike and the initial euphoria of the Fed’s action has already been lost in the stock market. All we need is a break of the uptrend line and I think we’re going to see another few days of pandemonium, if not weeks. Next week should be interesting.
Energy Stocks: (XLE) (UNG) (USO) (LNG)
We’re down into the $34 range in crude and getting very close to the 2008 support around $32. I’m sure we will get a bounce once we hit the $32 level, but with the glut of oil and no decline in production, I don’t see any extended rebound happening anytime soon.
Financial Stocks: (XLF) (IYF)
If you look at the SPDR Financial Select ETF (XLF) below, you can see how the market reacted to financial stocks on Black Monday last August. This chart follows the same ‘rally of hope’ that is displayed by the S&P and I think we will get another crash in financial stocks coinciding with a crash in the S&P.
This is setting up for a good short trade. I plan to buy spring 2016 Puts on (XLF).
Commodities: (FCX) (JJG) (DBA)
Commodities are dead. Inflation brings life to commodities and right now we are in a deflationary mode.
US Treasury Bonds: (TLT)
Not much action in Treasuries at this time. I’m waiting on stocks and gold to make the first move.
This Is What A Financial Crisis Looks Like
We are witnessing a race for the exits unlike anything that we have seen since the great financial crash of 2008, and many of those that choose to hesitate are going to end up getting totally wiped out.
"In Short Janet, It's Too Late" - Albert Edwards Calls It With These Seven Charts
"The party's over and bond investors who always tend to be more sober types, realize this and have headed for the exits whereas equity investors are so intoxicated they haven't realized that the music has stopped. Equity investors are still gyrating around the dance floor - just as in 1999 and 2007... I believe the Yellen Fed will soon be treated with the same contempt the Greenspan Fed was in the aftermath of the 2008 financial crisis. And they will deserve it."