Oct 10, 2012

I want to take a step back from the current style of trading that I have been pursuing. Job changes prevent me from having access to the markets throughout the day and preventing huge losses with current volatility has been impossible. I want to begin a new path of identifying larger trends and cycles that can be traded over weeks and months while maintaining a consistent return and limited downside risk. I want my primary interests to continue in Silver, Gold, USD, Metals Miners, and Energy. I prefer to stay from equities in general strictly because of the risks associated with individual companies. The exception to this rule is a general following of the S&P which I feel aids in the understanding of the general market sentiment. I also feel that I have a better understanding of this sector of the market and I refuse to trade something that I do not know. It is never in the interest of risk management to do so.





First off is a look at GDX. I think miners are grossly oversold and have been since this summer. This remains true with GDXJ also. The following chart is about an 18 month view which shows some important levels of support and resistance. The red arrows associated with the MACD and RSI are clear indicators of broken trends and signal a sell. You can see that we currently once again have a strong sell signal on both indicators. The bullish factor we have to consider right now is the cross of the 50 MA over the 200 MA. This is a great indicator setting up for a longer period bullish trend. However, I believe it is typical for any major cross like this to be retested. This coincides strongly with the current setup in the USD which I will touch on in a moment.

The USD entered a fairly convincing downward trend that lasted since end of July. At the bottom, we saw a very large bear flag form and consolidate for 14 days. On the 15th, the flag finally broke like textbook flags would. However, buyers entered the picture and have since gave us a swing low, invalidating the breakdown from the bear flag. Not only have we regained the trendline in which was broken from the breakdown, but we have regained the longer term trend which we followed during the whole downtrend. Also, notice the buy signal crossover on MACD to start the bear flag.. and then notice that it did not cross backover when the bear flag broke to the downside. I believe this is a very strong signal that the breakout to the downside had no conviction.. the reason we got a reverse. From this point, I believe it's safe to say we see 2-3 weeks of dollar strength. Price should push towards the 61.8% fib level as well as the 50 MA. From there, further weakness from the underlying fundamentals should prevail.

I'm going to touch on gold and silver together, while only displaying the silver chart because I feel they have extremely similar setups. In contrast, and inverse of the $USD, you can see metals have rallied since the end of July. There haven't been very many period of pause and hardly any correction. RSI has shown a steady rise since June. The trend was just broken even though our current prices have been in a sideways consolidation pattern. This consolidation has helped work off some of the overbought conditions, but there seems to be a little more room to go. I believe the bullish large and small specs will only remain in their positions for so long before they decide to exit the sideways market with profit off of the bottom. When this happens, the only thing left is for the vast amount of commercial shorts to push price down until a level of support comes into play triggering buying. Again, the 50/200 MA cross would do us well  along with the 38.2% fib level around $31.80. If this level does indeed pan out, I plan to be a heavy buyer at that point.

Crude Oil is behaving differently than metals. We have a slightly different set of fundamentals which drive oil. Due to these fundamentals, I believe oil could leave it's inverse action with the dollar behind for a while and trade positive. This is not yet seen, however. Oil has to cross some very critical points in order for this to happen. You can see that we've made a nice bump up against the 50MA. It served as a perfect point of resistance. For the tide to turn, a clear breakthrough and close above the 50MA would trigger some buys with an added retest of the 50MA being ideal. Also once again, notice the clear sell signal indicated by the RSI. A swing in price above the 50MA would also give us a nice buy signal with a crossover of the RSI back into it's trend.

Outlook:

Short term bearish on metals. Dollar strength lends a hand in pushing metals down into oversold conditions. Any snapback rallies from these lows, in a QE environment, should prove to be explosive. Also, for anyone following metals for any period of time, you already know that the downside comes extremely fast as well.