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and Broad Market is Exhausted
by Chris Vermeulen
Broad Markets on the
Brink of Destruction
Monday the NASDAQ 100,
SP500 and Dow all gapped higher with average volume above the recent
consolidation levels. This appears to be the same setup we had on November 4th
which was an exhaustion gap followed buy heavy selling down to new multi year
lows. The chart below is of the SP500 ETF but the QQQQ and DIA all show the same
price action. I'm not saying we are headed lower but caution must be taken here
incase this play like it did a month ago.
SP500 Daily Chart
extremely high for equities, and holding cash is the best position at this time.
Many traders are trying to pick the bottom and I recommend not playing that
game. No one knows when and where a bottom will take place and with current
volatility levels, you can lose 10% in one day. Let's not worry about missing
the first rally, which will most likely be a sharp couple days straight up, but
instead wait for a safe opportunity to put our hard earned money to work and
continue to add to positions, as we get corrections.
Gold & Silver
Outlook: Gold and silver closed lower on Friday. Gold
had a long lower wick which generally indicates a small one or 2 day bounce
could occur early next week and we got that today.
Gold & Silver's Long
The 13 year gold miner's
index chart shows a very large cup and handle pattern, which is a long term
bullish pattern. Prices have eroded sharply this year, pulling the index back
down to a major support level in October and November bouncing sharply higher
off this level. We will keep our eye on this chart as the gold market unfolds.
Bugs Index is a great indicator and generally I
find it leads the price of gold for up to 4 days on the daily chart and up to 2
months on the monthly chart in some situations. The monthly chart of the HUI
shows a very clear picture, as to where we stand for gold and gold equities.
Again we have had a solid bounce off support, but what we really want to see
here is the HUI to continue climbing faster than the price of gold, which will
help confirm the bottom for gold prices. It is important to note that bear
markets tend to pull all stocks down with it, which is why the ratio between the
price of gold and gold stocks is so extreme. As sellers force stocks down in
fear of losing more money, investors are slowly buying gold, as it is generally
a safe haven during times like these providing some support for gold.
Gold Bugs Index -
Monthly Chart of HUI
Gold & Silver's Short
The daily HUI chart (gold
Stocks) is something I pay close attention to, simply because gold stocks
generally out perform the price of gold in rallies. As you can see in the chart
below, the gold bugs index has made a higher low and a higher high. This is
generally the first sign of a trend change. If the HUI does not break below our
support trend line and we get a bounce, then we will be looking to buy gold
equities and gold with low risk setups (risk under 3%).
Gold Bugs Index -
Short Term Gold Prices
The GLD exchange traded
fund continues to struggle but looks to have formed a solid support level here.
Although the price action of gold does not look very strong, it is a good sign
to see gold equities showing strength, as they generally lead gold prices. If
things work out in the next 1-3 weeks, we could be getting an intermediate buy
signal for gold and gold stocks, but waiting for the market to prove it, is
important as we do not want to invest only to see the price drop out from below
us. The chart below shows the price of gold with our support level and also
shows equities strength compared to the price of gold which is the bottom
indicator on the chart.
Gold Prices - GLD
Gold Exchange Traded Fund - Daily Chart
Gold Equities ETF - GDX
Market Vectors Gold Miners
When trading gold stocks I
prefer to trade the GDX exchange trade fund, because it provides excellent
liquidity and performs very well with my trading model. It also holds high
quality PM (Precious Metal) stocks. As you can see from the chart below, it
looks very similar to the gold bugs index (HUI). Price action for this fund
looks strong and if we get a low risk setup within in the next 1-3 weeks, we
will put money to work with this fund.
Traded Fund - Daily Chart
Silver - The Unpopular
& Undervalued Metal
I have had my eye on
silver for several years watching it go from $5 to over $20 within 5 years.
That's an average of 60% per year return which is what opened my eyes to his
shiny metal. Silver is a metal, which only a small group of investors actually
own compared to its popular sister (Gold). That being said, most investors only
jump on the band wagon after things become popular. Silver in my opinion could
be the next really big winner. I do think Gold and Oil will be much higher in
the long term, but will not offer the type of returns silver could yield us. So,
this is why I am pointing out silver at these prices and looking for a low risk
entry point. Silver is down over 50% from its highs and also looks to have found
support at long term support levels.
Silver's Short Term
As mentioned, above silver
is an investment which I think could be the next popular metal and generate
massive returns. Below is the daily chart of the silver (SLV) exchange traded
fund showing that we are near a buy point if things continue to hold up.
Traded Fund - Daily Chart
Gold and Silver
Gold and Silver metals and
equities are showing signs of a bottom and possible entry points for our money
to be put to work for a counter trend trade.
Most commodities and
equities are at levels which are very important to hold, and if these current
prices do not hold up, we may see another substantial drop in almost every
investment vehicle from commodities, equities, real estate and possibly the US
dollar. I would expect gold to hold its value the most, if the broad markets
crack and continue their death spiral lower. My main concern is that people will
start to sell all their investments like gold and silver because they will need
money to cover living and credit expenses. If this starts to happen, gold may
not hold its value either. That being said, we can short gold, silver and the
markets so it's not that big of an issue in that respect. Also the markets are
looking fairly strong as of Friday and a bottom may have been put in already. If
we do get these setups you SHOULD invest in BOTH gold and silver, as a powerful
diversification strategy. There certainly have been times when gold prices have
held up better than silver and vice-versa. Hold both precious metals and you
iron out some of the fluctuations inherent in the market while maximizing your
The Oil Outlook
Crude Oil closed lower on
Friday breaking down below its channel, posting a new low for the year and
Monday popped higher back into its channel as it was very much over sold. Lower
oil prices generally help boost the markets and allow everyone to pay a lot less
at the pumps and reduce manufacturing and shipping costs so it would be nice to
see things stay low for oil for a few months at least, but I am sure its headed
much higher once OPEC cuts supply later this week.
You will notice on the
chart below, that Oil equities have been holding their value compared to crude
Oil which is the indicator at the bottom of the chart slowly climbing. I believe
that's because stock valuations are at levels most of us have never seen before
and may not ever see again. Most of these energy companies pay dividends and
people are accumulating positions paying high yield rates. Stocks typically
anticipate economic recoveries and turn 6-9 months in advance, so this is what
we could be seeing here.
Oil prices move with
daily/weekly demand levels and thus are a real-time indicator of supply vs.
demand for the commodity. Oil prices could continue to slide to the $25 level,
which was mentioned by several forecasters this week, as demand continues to
I currently do not see any
near term setups in Oil or Oil equity funds, and the chart below shows how
momentum for Oil and Oil equities are trending up, while Oil continues lower.
This is a bullish sign for crude but I want to see some foundation building
before we put money into energy. I'm thinking we are getting close to a bottom
but generally 75% of the move comes during the last 25% of the time. Trading low
risk setups is important when trading in high volatility markets like this.
Crude Oil Fund -
USO Exchange Trade Fund
We continue to wait for
the Oil industry to smooth out and provide a solid foundation for a possible
short play or a long position. Doing anything at this level is simply chasing
and generally a losing position.
News Weeks Game Plan:
The broad market looks
fairly strong, as it closed higher on Friday at the top of its trading range. If
we do get a pop next week in equities, then our PM (precious metal) equities
funds should make substantial moves. I will send out daily updates to keep
everyone up to speed in case we have some signals, and to keep in touch
answering all your questions.
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