During the last couple weeks the SP500 index has been taking a beating leaving many traders left holding the bag at high prices.
Fortunately, I cover several different investments so we when one is not giving us a trade, another one should be.
Taking a look at the technical analyst trading charts below you will see how a simple reversal candle coupled with volume can generate low risk and highly effective trades that move in your favor quickly.
If you want to learn how to read and trade the charts like a pro, be sure to join my daily video analysis newsletter which is jam packed with trading education and tradable ideas each day.
During the recent weeks we have seen commodities especially precious metals continue to drop in value. Market participant sentiment has become more bearish on commodities and couple that with a rising dollar it’s no wonder why we continue to see commodities as a whole fall in value.
Money has been flowing out of bonds at record levels this summer telling us most of market participants are feeling bullish on the stock market. This shift in sentiment of the masses are typical as they move their money from the risk on safer assets (bonds & commodities) and rotate into risk-on assets like stocks. While this is a bearish (contrarian sign) stocks could easily continue to rally for an extended period of time and possibly several more months before they actually top out.
Let’s take a look at the financial market business cycle diagram:
Bond prices have been falling for months and they typically lead the stock market lower. I feel we are starting to enter the phase where stocks will soon top and head lower also. Once this starts money will naturally flow into safer assets that are more tangible like commodities.
Keep in mind this cycle is very slow moving and rotation from one phase to another takes months. This is a process not an event but it is still very tradable.
Now let’s fast forward to precious metals both gold and silver are likely to do in the next couple months. If you review the charts below you will see gold and silver bullion prices are looking primed for a bounce/rally from these deep oversold levels.
Gold Weekly Price
Silver Weekly Price
Take a look at a basket of commodities through the GCC ETF.
GreenHaven Continuous Commodity Index Fund (GCC) is an Exchange-Traded Fund (ETF) that provides an innovative and efficient way to deliver broad based, diversified commodity exposure. It aims to achieve this by using futures contracts to track the Thomson Reuters Equal Weight Continuous Commodity Total Return Index (CCI)†. The CCI-TR is an equal weighted index of 17 commodities plus an additional Treasury Bill yield. Because of the equal weighting, GCC offers significant exposure to grains, livestock, and soft commodities and a lower energy weighting than many of its peers. In addition, GCC is rebalanced every day in order to maintain each commodity’s weight as close to 1/17th of the total as possible.
So, knowing metals are 24% of the index it bodes well for a bounce in the overall commodity index. Keep in mind this report is only focusing on precious metals, but many other commodities look ready to rally also like natural gas.
GCC – Continuous Commodity Index Fund Weekly Trading Chart
The chart below shows a very bullish 4 year chart pattern. At the very minimum a bounce to the $29 is highly.
Commodity Basket Trading Conclusion:
In short, commodities as a whole remain in a down trend. Until they show signs of real strength I will not be trying to pick a bottom. Several commodities are starting to look oversold and ready for a bounce like sugar, coffee, copper and natural gas.
Last month I talked about how a major market top is likely to unfold during the second half of this year. I still believe this to be true. But keep in mind these major market tops which only happen every few years are a MAJOR PROCESS. They take time to form and often we will see a series of new highs followed by quick sell offs as the market gets more people long as they big money distributes their shares/contracts into the new money rotating into the market.
The two most popular investments a few years ago have been dormant and out of the spot light. But from looking at the price of both gold and oil charts their time to shine may be closer than one may thing.
Seasonal charts allow us to look at what the average price for an investment does during a specific time of the year. The gold and oil seasonal charts below clearly show that we are entering a time which price tends to drift higher.
While these chart help with the overall bias of the market keep in mind they are not great at timing moves and should always be coupled with the daily and weekly underlying commodity charts.
Now, let’s take a quick look at what the god father of technical/market analysis shows in terms of market cycles and where I feel we are trading… As I mentioned last week, a picture says a thousand words so why write when I can show it visually.
Precious Metals like gold and silver are nearing a bounce and possible major rally in the second half of this year.
Crude Oil Seasonality, Price Chart w/ Analysis:
Crude oil has been a tough one to trade in the last year. The recent 15 candles have formed a bullish pattern and with the next few months on the seasonal chart favoring higher prices it has been leaning towards the bullish side.
Commodity, Gold & Oil Cycle and Seasonality Conclusion:
In short, I feel the equities market is nearing a significant top in the next couple weeks. If this is the case money will soon start flowing into commodities in general as more of the safe haven play. To support this outlook I am also factoring in a falling US dollar. Based on the weekly dollar index chart it looks as though a sharp drop in value is beginning. This will naturally lift the price of commodities especially gold and silver.
It is very important to remember that once a full blown bear market is in place stocks and commodities including gold and silver will fall together. I feel we are beginning to enter a time with precious metals will climb but it may not be as much as you think before selling takes control again.
Final thought, This could be VERY bullish for the Canadian Stock Market (Toronto Stock Exchange) as it is a commodity rich index. While the US may have a pullback or crash Canadian stocks may hold up better in terms of percentage points.
Today’s gap higher in stocks has many investors feeling really good about but will this rally last?
My to the point answer is “Yes” but there will be some bumps and navigating positions along the way.
Looking at the charts below you will notice how stocks are trading up over 4% in two trading sessions and several indicators and technical resistance levels are now being tested. Naturally when several resistance levels across multiple time frames, cycles and indicators we must be open to the idea that stocks could pause or pullback for a few days before continuing higher.
Here is a quick snapshot of charts I follow closely to help determine short term overbought and oversold market conditions.
This chart helps me know when stocks are overbought or oversold. This trend can be follows using the 30 or 60 minute charts helping you spot short term tops and bottoms.
Stocks Trading Above 20 Day Moving Average:
This chart helps me time swing trades which last for 1-3 weeks in length and I use the daily chart to spot these reversals and trends.
Daily SP500 Index Chart:
This chart shows the big gap in price, test of upper bollingerband, momentum and swing trading cycles topping and 12 buyers to ever one seller on the NYSE which tells me everyone is running to buy everything they can today and that is a contrarian signal.
This strong bounce which started on Monday from a very oversold market condition does look as though it has some power behind it. And over the next 1-3 days we could see prices grind higher until this momentum stalls out. Once that happens we should see most of the gap filled. This will provide us with a lower entry price and reduce our downside risk for index, sector and commodity ETFs.
If you are a stock trader then be sure to checkout my partners stock trading website www.ActiveTradingPartners.com where his last two trades Dec 31 pocketed 12.3% with gold stocks ETF NUGT, and took more profits with PRLB Jan 2nd for a 9.2% gain.
This type of bounce and momentum can lead to a running correction which makes it impossible for traders to by on a dip. A running correction is when prices slow chop higher in a narrow range for some time then explode higher continuing its rally. This is when you just need to jump in trades and chase prices higher but we will not do that until I see signs of a running correction.
Today many of the major market moving stocks are testing resistance which means if they start to get sold the broad market will pullback with them.
With housing on the rebound in the United States, the exchange traded fund for lumber, Guggenheim Lumber (NYSE: CUT) is also rising. Jumping too is the exchange traded fund for oil, United States Oil (NYSE: USO). As the chart below reveals, there is a strong correlation between the two exchange traded funds.
Lumber ETF CUT
According to one analyst, “Another industry that looks very attractive right now is the timber industry. Any pickup in the housing construction and remodeling activities will result in increased demand for wood. Further, most timber companies deferred their harvest when the demand for wood was low while the assets (trees) continued to grow and so when the housing market returns, the cash flows from harvest operations will increase in a big way.”
The previous lumber price peak was in 2004. That was about a year before housing prices reached the top. As an analyst noted, “Lumber prices tend to do better when economic growth has started to improve but not to the extent that short-term yields are moving higher. There is a pocket of time before long-term interest rates swing higher through until the Fed begins to tighten credit that seems to favor lumber futures.”
That certainly explains the correlation between lumber and oil. Each is a function of economic growth. When the economy is strong, more oil is used and the USO rises. When the economy is expanding, more homes and other buildings are constructed, requiring more wood; which sends the CUT higher. What is noteworthy about the chart is how each both United States Oil and Guggenheim Lumber started declining from May, which is traditionally the strongest period of homes sales.
However, economic growth in the United States is falling while unemployment is rising. Eventually, the fundamentals of basic supply and demand are accounted for in all commodity prices. The recent jump in the price of United States Oil and Guggenheim Lumber can be attributed to speculators anticipating more economic stimulus from central banks, particularly the Federal Reserve. If the Federal Reserve initiates more quantitative easing, commodity prices could rise again due to the weaker dollar as transpired from November 2010 through Jun 2011, the period of Quantitative Easing 2.
As such, expect greater volatility as Bernanke’s August 29 speech at Jackson Hole approaches.
CUT Exchange Traded Fund
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The exchange traded funds for agriculture, PowerShares DB Agriculture (NYSEARCA: DBA), and natural gas, United States Natural Gas (NYSEARCA: UNG), have both benefitted from the record heat and drought in the United States
Due to the Midwest drought, the prices of Corn (NYSEARCA: CORN), soybeans (NYSEARCA: SOYB) and other crops have skyrocketed, leading to a 9.96% jump for the DBA over the last quarter. During the same period, the CORN rose by 33.28% with the SOYB increasing by 9.05%.
No mystery there: basic supply and demand, reinforced by speculators and momentum trader along for the ride.
For the rise in the price of natural gas, the record heat means that air conditioning usage has soared for both businesses and residences. As a result, the UNG is up 30.41% for the quarter. Over the last 52 weeks of trading, however, the UNG is off by 47.92%. There was a greater supply due to advances in fracking and reduced demand due to a warmer winter in the United States.
The last month of market action for the UNG has witnessed another 14.26% jump, along with a 2.13% spike for the most recent week. Record price levels are being reached for the commodities. The CORN and the SOYB are near 52-week highs, with the DBA not that far below.
This will not last for the UNG and the DBA. It will not last for the CORN or the SOYB, either.
At present, there is a short float of 53.05% for the UNG. That is staggeringly high. A short float of 5% is considered to be troubling for a security. In addition, the short float for the UNG has been increasing.
The technical indicators confirm the weakness of the present price levels of the UNG, DBA, CORN and SOYB. There have been multiple corrections and pullbacks for each. Volume is falling. Relative volume was lower by one-fifth in the most recent trading day for the UNG.
As the chart below reveals for the UNG and the DBA, the price increases are completely due to the effects of the weather. That will eventually and inevitably change, well, just like the weather. The rise that has taken place for all since June will be reversed. Those positioned from this will reap a bumper harvest of profits.
Teucrium Corn, (NYSE: CORN), the exchange traded fund for corn continues to sizzle like the hot summer sun baking the Midwest farm region of the United States. CORN is up 3.37% for the last week of market action. For the month, it has risen by 22.66%. The last quarter of market action has witnessed a 31.83% rise.
The United States produces about 40% of the world’s corn. At present, the corn supply is lower by 1.82 billion bushels to 12.97 billion. This is a 12.3% decline in supply that is supporting an increase in CORN of about three times that amount within the last quarter. That is poised to collapse.
In addition, the technical indicators are showing a weakness in the exchange traded fund. The relative strength index rating is at 71.44, well into overbought territory. The short position has increased substantially. Recently, CORN crossed under its 10-day moving average of $48.79 on a volume of 169K shares. This type of crossover portends lower prices for the future. A similar situation with SOYB ETF which is the soybean exchange traded fund if you want to see another interesting setup.
At $51.27, CORN has just reached a new 52-week high. The trend is definitely the friend of the shareholders as it is trading well above its 20-day (7.47%), 50-day (23.56%) and 200-day (26.48%) moving averages. Volume has been very, very heavy.
The heavy volumes combined with the slowing price surge are indicators of an approaching sell off. Three times in July already there have been sharp price declines for CORN. As the saying goes, “grains take the stairs higher and the escalator lower.”