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Charts Show Calm Before a Storm

A look at charts of stocks and metals shows these markets could be preparing for a big drop.

This week has been playing out as we expected. Last week we saw the market rally on light volume into a resistance zone on the daily chart. Light volume rallies are always a warning sign -- the calm before the storm.

Bearish price action tends to see the following two phases:

Heavy-Volume Selling Day

: A large institution sells massive amounts of investments (stocks and commodities) because prices have risen enough for it to book profits

or

because it knows something we don't.

Light Volume Rally/Drift Higher

: After a heavy-volume selloff, prices typically drift higher on light volume. This is when institutions stop dumping investments and allow retail investors (i.e., uneducated traders) to buy the market back up.

In a down trend we see these two phases alternate. These patterns happen on every time frame from tick charts to yearly charts. Down trends may vary in length from one or two cycles to 10 to 20 cycles or more.

Current Market Conditions

So far this week we have seen the market sell down on increasing volume. This is bearish and points to lower prices. On Wednesday we saw prices move up on light volume with volatility rising into the close with a short wave of selling. This indicated that sellers were starting to enter the market again.

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The daily chart above clearly shows the heavy selling and drift higher on declining volume. The market is now trading deep into a resistance zone and looking ready to drop.

S&P 500 Intraday Two-Hour Candle Charts

You can see the same selling patterns repeating themselves. Since the Feb. 5 bottom we have been forming a much larger bear flag, which makes me think a

big

drop is only days away.

S&P 500 Trading Conclusion

Both stocks and precious metals are trading with the same chart patterns and volume levels. So if you are wondering about gold, silver and oil, a similar scenario is playing out for them also.

I keep bringing these bearish patterns up in my reports because once you master trading in a down market then you can make money during some of the fastest moving times in the market. I have always preferred shorting the market because prices drop much faster then they rise, allowing me to make profits quickly.

Also, if the broad market does roll over later this year (I am not saying it will, just

if

it does) then you will feel somewhat comfortable with the positions I will be taking.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.