Stick With the Underlying Trends
It's so far been a roller coaster week as stocks and precious metals plunged on heavy selling volume on the back of a rising dollar, only to make a strong rebound Wednesday. While there has been significant intraday price movement, it was no surprise to me as I've been anticipating this pullback.
Let's take a look at the charts.
U.S. Dollar Daily Trading Chart
The dollar the past couple of weeks has traded in a choppy fashion, and last week I mentioned to subscribers to keep any new positions small. The dollar looked ready to make a bounce, and if it reverses we'll see stocks and commodities correct rather sharply.
Last week I trimmed some profits on my gold and
S&P 500
trading positions in anticipation of a rising dollar and lower equity and metals prices. The dollar is currently in a downtrend so I'm still trading with the trend, but the next couple of sessions could change that.
On the chart you can see a similar pattern to what we saw during the May and June top has now formed in reverse this month. It's a simple pattern I call a drop-n-wash. It is like dropping a knife -- you panic and then take action (in this case moving your foot, then washing the knife). That is typically how the market reacts to this type of price pattern after an extended trend has taken place for a long period of time.
The dollar made an obvious breakdown which the entire world witnessed causing traders who recently went long to panic and sell their positions. Those who like to short the dollar would have taken a short position, only to see the market reverse and head straight back up again. This pattern has yet to confirm, but by looking at shorter time frame charts I have a feeling the dollar may continue to rise. However, until the dollar shows considerable strength I am still playing the long equities/long gold side of the equation.
S&P 500 ETF Trading Fund
The S&P 500 made a nice move up last week and I trimmed my position back to lock in more gains as I anticipated this pullback and possible gap fill. As you can see on the chart, the moving averages are all heading up and that's the direction I'm still focusing on playing.
During the morning dip Wednesday market sentiment started to shift to become extremely bearish on the short-term time frame (10-minute charts). If the market drops down to fill the rest of that gap I have a feeling the majority of traders will panic out of their positions giving us an extreme sentiment buy signal. Also a gap fill will bring the price down to the key moving averages which will act as a support level.
Gold ETF Trading Fund
Gold has much of the same story as the S&P 500 but with a couple twists. Gold has huge global demand from banks, investors and traders adding more buying power to this investment than stocks right now. We could see gold hold up above its gap that formed last week. That being said, a pullback to the key moving averages would not only act as a major support level but also fill the gap. I currently have my long positions, but trimmed some profits near the highs and are sitting tight letting the market work itself out.
In short, the focus should be kept on trading with the underlying trends until a trend change has been confirmed. So that means short the dollar, long equities, metals and oil.
But because things are starting to look unstable it is crucial to trade smaller position sizes during times of uncertainty like this. Anticipating major market tops is a very difficult and generally costly play -- just ask everyone who has been trying to pick a top for the past two months. Anticipate trend changes, but don't trade them until the price or volume action confirms the new trend.
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.
