Fed Folly Play: Commodities - TheStreet

Fed Folly Play: Commodities

A painful reality check will appear when these quantitative easing policies create inflation without employment or productivity gains. That's where commodities step in.
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By Chris Vermeulen, The Gold and Oil Guy

The purpose in owning commodities like gold, silver and oil is to protect oneself from the effect of inflation that I believe will begin to assert itself in the coming months.

Unfortunately, the U.S. has taken a monetary policy of printing massive amounts of money to attempt an escape of deflation. In just the past 16 months, the monetary base has ballooned from $908 billion to $2 trillion. Bailout funds in the past two years total $8.1 trillion. That is 78 times more than what they spent to bail out WorldCom and 123 times more than they spent on Enron. U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. These are scary numbers!

The illusion of economic recovery in the U.S. is simply the function of the


making billions and trillions of newly printed money available at literally zero percent interest to the largest financial institutions. The idea that you really can get something for nothing is fantasy. But that's what's happening -- money created out of thin air, instead of created by production.

A painful reality check will appear when these quantitative easing policies create inflation without employment or productivity gains. Commodities -- hard assets -- will outperform everything in this type of environment. To some people, commodity investments may sound like a no-brainer investment. However, without a sound money and risk-management system in place, there really is no such investment.

This is why I focus on technical analysis as it provides price points for investments when we should be putting our money to work on a weekly or monthly basis. When volatility is rising, I put less money to work to protect my portfolio from sharp price movements (risk). And during low volatility, I push more money into the market catching trends with lowered risks.

What really blows my mind is how almost everyone I know who employed a broker or financial adviser lost between 30%-70% of their portfolios during the market crash. What the heck was everyone paying for?

What I am trying to say is everyone can make money in a bull market. The question is, do either you or your financial adviser know when to take some profits to lower overall risk? How much money will you give back when the market corrects, starts another bear market or is affected by a terrorist attack? Do you have protective stops in place?

OK, that's enough of that; let's get to the charts.

The gold futures chart allows us to trade prices around the clock 23 hours a day. A lot of important price patterns are analyzed from the overnight trading hours, which help to provide low-risk and high-probability setups for the GLD gold fund.

This hourly chart shows about three times more trading data on gold than the GLD ETF. Using this data, we know if gold will be gapping higher or lower the next day, and if the price is trading near a support or resistance level, etc. I focus on selling short gold at resistance levels in a downtrend and buying dips during up trends.

The futures trading volume is very interesting to look at. The selling volume was more than twice what we are seeing for this bounce/rally. A low volume rally/bounce is not exactly what we want to see for a move higher. I have my doubts about this being the next leg higher, but let's watch it unfold.

Trading just the U.S. market sessions does limit opportunities.

When commodity ETFs open each day, they tend to gap up or down as the overnight trading moves the price. To most traders, GLD is an ugly-looking chart because of its tendency to gap up and down each day. But when you focus on the gold futures charts for trend and price-pattern analysis, things become very clear.

Gold is moving higher currently, and I am waiting for a low-risk entry point before jumping on board. I don't chase prices higher unless there is a lot of excitement in the air with lots of momentum to back up the higher-risk play and, I do not feel this is a time to panic and buy gold.

Silver has had a nice pop, and I think it will out perform gold when the time comes.

But this upward-slanted megaphone pattern is not what I like to trade. While it is still bullish, it's close to a neutral pattern and breakdowns from this can be fast and painful if you do not have a protective stop in place.

It's looking a little long in the teeth for this bounce so I am waiting to see what happens over the next few days.

Oil has had a great bounce off of a major support level back in December.

Oil is now testing its October highs. It will take a few weeks for a new setup to form in oil, as buying here carries about 15% downside risk.

Last weekend I got together with my buddy who is a futures broker in Toronto.

We spent a bunch of time going over some charts, swapping thoughts, ideas strategies, etc.

He said a ton of people are opening futures accounts and wanting to trade natural gas. He said that is a suicidal thing to do and that almost everyone who opens an account to trade natural gas loses all their money within three months. Natural gas is one commodity for which you need to have a solid trading strategy along with strict risk and money management.

Natural gas on the UNG chart looks like a possible short play. But let's wait and see how things unfold this week.

Gold, Silver, Oil and Natural Gas Trading Conclusion:Trading and investing with technical analysis allows us to assess the current market volatility and trends. Understanding these things will help protect your hard earned money.

It looks like 2010 will be a fantastic year for trading!

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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. Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return.