Make Money With Trend Trading
NEW YORK (
) -- The financial markets continue to climb a wall of worry on the back of more
Fed Reserve
quantitative easing. Those trying to pick a top in this choppy bull market may prove to be correct for a couple hours, but over time the shorts continue to get clobbered.
As I'll explain later, quantitative easing was enough to turn gold back up and gave oil just enough of a nudge to break out of its cup-and-handle pattern.
In recent weeks I've received lots of emails from traders asking what they should do about short positions they placed on their own.
When my email inbox starts to fill up with traders holding heavy losses who are trying to pick a top, I know something big is about to happen. It's not going to be in the favor of the herd (everyone shorting).
In the past couple of weeks there have been some great entry points for the broad market. Today I'll focus on trading with the trend and entering the market on extreme sentiment readings.
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Extreme Sentiment Indicators
Above are my main market sentiment indicators for timing short-term tops and bottoms. Please note, however, that I don't pick short-term tops hoping to profit by placing bearish trades. Instead, I wait for an extreme sentiment bottom and then enter the market by going long.
Once there is a 1% to 2% surge in price and sentiment indicators are showing a short-term top, I like to pull a little money off the table to lock in some profits while still holding a core position.
This is exactly what I have done over the last couple weeks. This is a simple yet highly effective strategy, and it works just as well when the market's in a downward trend. (In this case, you just focus on shorting extreme sentiment bounces.)
S&P 500 Running Correction
Since early September the equities market has been on fire, as you can see above in the chart of
SPDR S&P 500 ETF
(SPY) - Get Report
. In late September the market looked like it was at a top and was trading at key resistance levels from prior highs. That convinced a lot of traders to take a short position. But instead of correcting, the market surged and has since continued to grind its way up week after week.
This rising choppy price action can be seen two ways:
As a rising wedge with a blow-off top (bearish)
As a running consolidation (bullish)
The running consolidation happens when lots of buyers appear to buy shares on every little dip. The intraday price action reveals the market trying to buck traders out before it continues higher. If read incorrectly, this choppy market action looks extremely bearish to the novice trader. And because the market is so overbought it easily convinces him or her to place short positions. This choppy action is just enough to wash out weak positions before the market starts another run-up.
That said, both a blow-off rising wedge and a running correction are very bullish patterns for a period of time. Again, I cannot state it enough: Trade with the trend and the key moving averages.
Gold Shines on Daily Chart
The gold story is straightforward. The trend is up, and quantitative easing is back. Key moving averages have turned back up, and gold closed at a new high, which shows strength.
Crude Oil Breaks Out of Cup
Crude oil has been dormant the past few weeks even though the dollar has plummeted. But last week's news about more quantitative easing was enough to send oil higher. The surge took oil prices straight to the 2010 highs and blew past my first target of $86.00 per barrel. I figure it will consolidate here for a while until we see whether the dollar has bottomed or is just testing the breakdown level.
Trading Conclusion
In short, the market has played out exactly as we planned. The market goes in waves in both price and for trade setups. The past couple weeks were great for getting into trades, and now the market is running in our direction. It will take a few days for the market to stabilize (pull back or pause) before we can get anther round of trade setups. Keep position sizes small as the market remains overbought and a sharp correction could happen at any time.
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At the time of publication, Vermeulen owned shares of SPY
.
--Written by Chris Vermeulen in Collingwood, Ontario, Canada.
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Ross Snel
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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.
