By Chris Vermeulen, The Gold and Oil Guy
I have been expecting the market to correct for the past few weeks. By looking at the price action on the weekly and daily charts, we can see that there has not been any real pullback since November.
Without regular market corrections, stocks start to become overbought, meaning everyone has/is buying them and no real sellers have jumped off the trend. So when the price in an overbought market starts to slide lower, we generally see many rush to hit the sell button. That is what causes the high-volume breakdowns similar to the
SPDR Gold Shares
ETF breakdown last December.
Another way of getting a feel for whether the market is overbought is to look at market sentiment for bulls vs. bears (buyers vs. sellers). Currently almost everyone is bullish, and with this high of a reading, we must start protecting our positions by tightening stops and/or get ready to play the coming correction with a short-term trading strategy.
We can add another level of analysis to assist our understanding of the market if we look at the 60-minute charts of the
The chart (below left) of the SPY clearly shows we are in choppy times.
With the majority of investors buying up stocks because they are bullish on both the economy and individual companies, we have continued to see the index rise. This has been going on for almost three months now, but the more recent price action in the SPY chart clearly shows there are some
sellers unloading positions into this buying pressure. When the big sellers slow their selling, we see the price drift back up until selling kicks back in. This is a warning signal for lower prices in the coming days.
The IBM chart shows a perfect example of "Buy on the Rumor, Sell on the News." Shares of IBM ran up into its earning news as traders know IBM is great for beating estimates. Once the great news came out, which actually beat the estimates, the stock sold off. This is happening everywhere with stocks.
In short, the market looks top-heavy and has also rallied into earnings season. These two points really have me on edge for taking a long trade at the moment.
Gold Stocks and the Dollar Chart
The HUI (Gold Stock Index) has been on fire the past 10 months. Both gold and gold stocks have been leading the market higher. But the past month we have seen gold stocks underperform the S&P, and as of today, they are testing a key support level. Only time will tell if it bounces or breaks, so keep a close eye on your positions.
I use the
Power Shares DB U.S. Dollar Index ETF
to show the price action of today's price move. The dollar is now above a key resistance level and has started to move higher. If the dollar continues higher, commodities across the board will have downward pressure. That could trigger a large selloff in gold and gold stocks, which I think are still overbought on a short term time frame.
Gold and Oil Futures Trends
The trend of gold and oil has been down the past few days. Gold broke down in the past 24 hours in overnight trading, which triggered a wave of selling when the U.S. market opened. Gold and oil are currently trading between key support and resistance levels.
I am looking for gold to drift back up to the $1,130 level, where I will look for a short setup, as the current price action is not bearish on the intraday charts.
Oil is still bullish, so I am not really looking to short it at this time. I will wait for another low risk buy signal.
Commodity Trading Conclusion
I feel the broad market could be ready for a large correction ranging from 5%-10%. I am calling it a correction, as I want to stay positive. But it could be the start of a major market top. Market tops tend to be a process and take several months to roll over. So let's focus on protecting our money and wait for a pullback that will allow us to load up with some great positions in the coming weeks.
Patience is how money is made in the market. Waiting for the market to come to you is vital for success. Also having the patience to let winners run by scaling out (selling a portion) of a position when the price reaches a support or resistance level makes it easier to let them run. Each time you sell some of a position you are locking in a profit and lowering your risk for the balance of that trade.
If you would like to receive my Free Weekly Gold Reports please visit my
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.