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Inter-market Analysis –
to Gold, Silver, Oil & Equities
by Chris Vermeulen
After a 10 week rally traders and
investors are starting to think twice about dumping money into stocks. Since
March, we have seen the equities market rally 30% and now everyone is starting
to think prices are a little top heavy.
So what do we do now if the market
is possibly forming an intermediate (6-10 week) correction?
I like to hedge my long term
holdings (retirement account). These are stocks which were purchased near the
market bottom and are paying high dividends. Using options or leveraged inverse
funds I hedge my positions until the market looks to be bottoming again. I like
to play the much shorter term trades which last 1-20 days using the triple
leveraged funds like FAZ and TZA.
That being said picking a top is
much more difficult than catching a bottom, in my opinion. Market tops form much
slower in general than a market bottom, so you have to be patient for the market
to roll over.
Trading a bottom is easier for me.
After a big sell off when prices start to show bullish price action all the
short positions start to buy back their shares surging prices higher. Then the
slow traders (investors) start to buy on the strength which can carry over for a
few days. The recent 10 week rally was extended much longer than normal because
so many investors were getting excited about the cheap stocks and they began
dumping money into the market. Not to mention institutions are back nibbling on
Below I show a little on
inter-market analysis. Inter-market analysis is one topic/skill which novice
investors don’t pay much attention to when first starting out. Inter-market
analysis allows us to take advantage of the financial markets as a whole.
For example: When the US Dollar is
in a strong rally, we will generally see gold and silver prices selling off.
This is a very basic and simple relationship. It's very important to remember
that everything in the financial markets affect each other in some way.
Dow – DIA Exchange Traded Fund
You can see in the chart below the
equities market has two possible scenarios. While nothing is ever set in stone
and analysis can change on a daily basis this is what I see most likely
happening over the next month. Equities will either continue to rally higher or
pull back to test lower levels of support and possibly make a new multi year low
but that’s still weeks away and my analysis will change on a weekly basis as the
price action unfolds providing new possible setups.
Depending on what the equities
market does from here will alter the course of gold, silver and oil which is
Gold Trading – GLD Exchange Traded
Gold has been moving up because of
fears that the equities market is topping out. I have found several
relationships between stocks and commodities that really help predict short term
Relationship Trading Tip – In My
Opinion, & Trading Style:
Gold stocks generally move or out
perform gold bullion before gold really start to move. They also do the same
in reverse; under performing means gold is most likely going to have some
short term weakness.
Gold during times of inflation
fear moves in the opposite direction of stocks. So if the stock market
continues lower gold will most likely move higher.
Gold bullion sold down in March,
15 days before the broad market rallied. Now gold is rallying which indicates
stocks are about to fall.
That being said gold stocks have
been advancing at a very fast rate out performing the price of gold bullion,
which is bullish for gold. Gold bullion started moving higher 15 days ago as
money started to move back into this safe haven because of fears that the stock
market is going to go down from here.
In my opinion, gold is a little over
bought, and we could see a pullback with some profit taking here. However,
overall I think gold has a lot more upside potential.
It is always important to think
ahead of what may happen to gold prices. Knowing when to exit your position to
lock in profits while still leaving enough wiggle room for prices to continue
higher is crucial to a trader’s success.
Silver Bullion – SLV Exchange Traded
Silver is doing much the same as
Silver shows a really nice looking
head and shoulders pattern, and if things unfold that way we could see a
breakout to the up side sending silver to $17-$18.
Just to show you some other ways
technical traders see this chart would be:
Reverse Head & Shoulder
4 Month large bull flag
Small possible bull flag (May –
Cup & Handle (if we get a pull
back, which is drawn on the chart)
Double Top (if price rolls over
and drops sharply)
So many people see different
patterns which is why we all buy and sell at different times. The key to making
money consistently in the market is to find or create a trading model what fits
your personality, then learning how to scale in and out of trades to locking in
profits, add to winning positions or cutting your losses. These are the types of
things I focus on which is how I grow my trading accounts over time.
Energy Sector – Stocks & Oil
The energy sector has had a very
nice run recently, but it looks like the ride may be over for a few weeks.
The chart below of the Bullish
Percent Index of energy stocks shows that the last time energy stocks were this
bullish (over bought) the broad market corrected. There are several sectors over
bought and when most stocks are in bullish patterns, which means its time for a
correction. This is because everyone is buying up stocks pushing them higher and
traders are becoming complacent.
We are now at the same situation as
we were in Late January, and I think we will see the broad market correct. The
energy sector I expect will make 15-30 day correction. Depending if we have
heavy selling or controlled profit taking will dictate price action and time
frame. Heavy selling will give a sharp sell off in prices while controlled
profit taking will allow energy stocks to trend sideways before the next leg
Energy Stocks – XLE Exchange Traded
A sharp panic sell off in the broad
market will send energy stocks much lower breaking a support trend line. If we
see profit taking, which is when traders exit some of their positions slowly
while new traders buy or add to their positions then prices will trend sideways
then continue to rally, in my opinion.
Crude Oil – Continuous Contract
In the past oil would move in the
opposite direction of the equities market but in recent months they have been
moving together. Again if the markets only pull back a little before starting
the next rally higher I think we will see oil move much higher. However, if the
market starts to slide on heavy volume it will most likely pull oil down with
As the economy gets worse there is
less demand for oil because of the decline in traveling, new products, house
hold income, etc…
Active Trading Conclusion:
My analysis is telling me that we
are likely to see the broad market decline over the next few weeks. How far will
it go? No one knows that, but being ready and positioned for it is important.
My concern is that large investors &
institution are going to step back in at any time, which will surge the market
higher and trigger the next round of buying. Most traders including me will
panic and put some money to work so that we don’t miss the next rally and that
panic is what skyrockets the market higher.
Emotions are very difficult to
control, which is why you must have a trading plan complete with entry and exit
levels for when investments start to move. It’s important to remember that when
the market is topping out it’s a process not an event. Expect it to roll over
slowly and drift lower. There is a point when panic selling will set in, and we
will see prices slide several days in a row. That is the time to be tightening
our stops taking profits on our short positions.
I would like to say we are in a bull
market but again no one every really knows 100% what the market is doing.
Trading is all about being positioned to take advantage of high probability
moves, locking in profits on spikes, adding on dips, cutting losses quickly and
or exiting the position on a trend line/technical breakdown.
Currently, it looks like gold and
silver are ready for some type of pullback. I have tightened our stops and will
look for an entry point to add to our core gold position after a pullback.
If you would like to receive my
trading reports please visit my website:
Vermeulen is Founder of the popular trading site
There he shares his highly successful, low-risk trading method. For 6 years
Chris has been a leader in teaching others to skillfully trade in gold, oil, and
silver 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. Reach Chris at: Chris [at] theGoldAndOilGuy [dot] com
This article is
intended solely for information purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor before
making any investment/trading decision. No responsibility can be accepted for
losses that may result as a consequence of trading on the basis of this