Gold, Silver, Oil, Gas Setups: A Technical View

Investing in today's toppy market is a matter of letting the market unfold over time and taking advantage of carefully measured low-risk setups.
Author:
Publish date:

This week has been playing out as expected with prices grinding their way higher and lots of sharp intraday selloffs and rallies which are indicative of a market getting toppy.

Seems like the masses feel as though they are getting left behind which is why we are starting to see the panic buying in the market, or new money buying at these lofty overbought prices.

Each time there is a new intraday or daily high on the major indices there is a renewed bullishness created as breakout traders and novice traders buy into the market hoping for the next surge in price. It is these volume surges of new money entering the market which the big guys, or smart money, are selling into. You can see it clear as daylight on the intraday charts as new money gets sucked into the market new high and then two minutes later larger waves of selling hit the bids.

We have some very exciting times ahead and it's just a matter of letting the market unfold over time as we take advantage of these carefully measured low-risk setups.

On to the charts.

You can see how the gold chart has evolved from pattern to pattern as it bottomed over time.

We had a breakout Wednesday and I expect to see a pullback which is normal when prices gap up and break out of a pattern. An entry point would be considered on a pullback if the proper criteria are met.

Silver always has been much more volatile than gold which is why the pullback early this year was so strong and why the recent rally also has covered so much ground.

As you can see silver has broke out above resistance but is now looking overbought. A pullback, or at least a pause, in precious metals is expected.

Oil has made a nice move higher the past week but I feel it will pull back also in the coming days for a breather. There are a couple sizable gaps to fill all the way back down to $40.50.

Thes natural gas chart looks very interesting. In the chart I am comparing the 2009 low with Wednesday's price action.

From looking at the chart, natural gas is way oversold and in dire need of a relief rally. As you can see the sharp rallies which occurred just before both the 2009 and the current possible bottom look identical. This type of price action is very common to see.

Let me explain: When an investment is this oversold, meaning it has sold lower for weeks if not months, then there is a large growing number of traders looking to pick a bottom. Once these traders see prices start to move higher they all jump in thinking it's the bottom. Sometimes it is, but more times than not it's just a suckers' rally.

The general rule is that if everyone can see it then it's most likely not going to happen. This also is part of the reason the major indices keep going up. It looks like a great short and a ton of traders are in cash waiting to take advantage of the drop. But the market will keep pushing higher until there's fear it's not going to pullback. That's when the new money buys back in fueling the grind higher.

Anyway, so after all the bottom-pickers jump on the train and there aren't any more buyers and the price tends to drift lower, these traders back out of the position. Eventually a new low is made and everyone is shaken out of the investment. The crazy part is that just as they get out, the price usually turns around and does exactly what they new was going to happen; it goes up.

Most traders have the direction correct, it's just their timing that is off. My general rule is when I see something I wait another bar. Sometimes I keep saying that to my self after each new bar until I am confident in the predicted move or price that I can get into the position.

In short, the bull market continues to grind its way higher. Unfortunately, we can't do much until there is some type of correction because buying way up here after a two- month rally is outside of my comfort zone.

I foresee a 3% to 5% correction starting any day now so I am keeping my gunpowder dry.

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.