What or Who is Behind the Buying in Crude, $CL

oil(greenup)With the myriad of players moving in and out of the Crude Oil markets and its affiliate or component products Heating Oil and Unleaded Gasoline, it becomes a definitive benefit to reference a “larger picture” view.  This helps determine the trend and prevents countertrend trading when the markets move into a transition from one level to the next.  Keeping the larger trend in focus removes some misaligned hesitation allowing us as traders to “participate” not “anticipate”.   Keeping the larger trend in focus puts and keeps in perspective, the direction of “runners”.  Trades that carry the potential and probability of posting 20, 30 or 40+ tick gains.

Bear in mind that while I continue to advocate trading without caring about the who, what, where, when and how, I do advocate the benefit of establishing the trend both on an intraday basis and then on an hourly and daily basis. Having somewhat of an understanding of the above mentioned adverbs as they pertain to trading and being more specific day trading, is useful.

elliottwaveIn previous posts, I have discussed the Elliott Wave count that has been underway in crude oil off of the 2008 highs at 147.27.  The monthly and weekly charts continue to follow a clear path that keeps the longer term trend down for now.  The current “bounce” off of the 26 level lows seen in January is best viewed as a 4th wave correction within an ongoing larger 5 wave sequence down. This larger 5 wave sequence down will complete the “C” wave down of the larger A-B-C decline off of the 147.27 high.

So, to recap progress thus far: Wave “A” down began in July 2008 and completed at January 2009 low at 33.20.  Wave “B” rallied back to the high in August 2013 at 112.25.  From that point then wave “C” has been unfolding and has thus far completed waves 1 – 4, which completed at high in May 2015 at 62.58.  Wave 5 of “C” will ultimately form it’s own 5 waves as it completes the larger parttern.  Within wave “5” of “C” internal waves 1-3 are complete and a smaller 4th wave bounce has been underway of the 26.05 low in February 2016.  While the potential remains in place that this smaller 4th wave is complete at last weeks 34.21 high the possibility of a finishing rally back above the 36 level remains in the picture for now.  Another possibility is that crude is forming a triangle pattern which will keep it in a tight trading range between 34.35 and 29.50 before completing and thrusting the market lower as the final decline begins.

crackspreadBack to today’s post title; the “What” last week was the contract roll out of March into April for both options and futures.  This week the focus appears to be back on the “crack” spread.  Wikipedia defines the crack spread as follows:

“Crack spread” is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it – that is, the profit margin that an oil refinery can expect to make by “cracking” crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products).

In the futures markets, the “crack spread” is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline andheating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from a change in the oil/gasoline price differential. – Source Wikipedia © 2016

FATCAT_WALLSTThe “Who” would be oil refining companies and the wealthy families that gleaned all their wealth from “black gold”.  Yes, I do have a few specific players in mind, but I’ll save that for another conversation.  Referring again to Wikipedia for a more pronounced description we can begin to put together the whole picture:

For integrated oil companies that control their entire supply chain from oil production to retail distribution of refined products, there is a natural economic hedge against adverse price movements. For independent oil refiners which purchase crude oil and sell refined products in the wholesale market, adverse price movements can present a significant economic risk. Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix.

For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z barrels of distillate in the futures market. The crack spread X:Y:Z reflects the spread obtained by trading oil, gasoline and distillate according to this ratio. Widely used crack spreads have included 3:2:1, 5:3:2 and 2:1:1.[1] As the 3:2:1 crack spread is the most popular of these, widely quoted crack spread benchmarks are the “Gulf Coast 3:2:1” and the “Chicago 3:2:1”.[citation needed

The following discussion of crack spread contracts comes from the Energy Information Administration publication Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries:[3]

Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product call options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts.

To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to lock-in a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.

An average 3-2-1 ratio based on sweet crude is not appropriate for all refiners, however, and the OTC market provides contracts that better reflect the situation of individual refineries. Some refineries specialize in heavy crude oils, while others specialize in gasoline. One thing OTC traders can attempt is to aggregate individual refineries so that the trader’s portfolio is close to the exchange ratios. Traders can also devise swaps that are based on the differences between their clients’ situations and the exchange standards. – Source, Wikipedia © 2016.

Putting on or taking off large positions can create problems as the depth of the market,  in heating oil and unleaded gasoline is much thinner than crude.    Recent news seems to point to a shift in the supply/demand equation creating a situation where larger players need to adjust positions.  On Monday, the bulk of trading in April crude was between 33.68 and 33.38, a relatively small range within the 223 tick intraday range, but a tradeable range when taking into consideration the trend was “up”

Check out today’s $CL chart for trades and discussion:

2016-02-22_15-12-58_CrudeOil

 

 

Is there a Wow Factor? Chart, $ES

wowfactorThe answer to the title question is an unequivocal “Yes.”  It could be the widening of your eyes in amazement as the $ES trades in a 20 to 30  point range both to the downside and upside in 30 to 75-minute increments for a good five hours straight.  Using the right tools, (signal generator and a good auto trader) gives you a strong probability of pulling many, many ticks as the hoards of dollars get tossed about.  Wow is actually the word most often heard when this type of volatility is at your finger tips to take advantage of.

wile_e_coyoteThen why is that so many of us “gnats” are getting caught up in an old habit of “anticipate.”  That level of frustration you feel is when you realize it has happened again.  There was that moment of hesitation or disbelief in the signal change.  That nagging voice of doubt saying you are buying/selling too soon or too late.  When this happens I don’t know about you but I always feel like Wile. E. Coyote trying to stop himself before heading over the cliff.

I suggested yesterday that as “gnats” we need to participate and not anticipate.  To do the latter first literally never gets the sequence of events rolling.  The cause of not participating is similar but most often generated by different emotional memories within each of us.

Trading without emotions is of course, dependent on getting to the root, making some adjustments, and moving forward towards participating with comfort and ease.  Remember your competition, for the most part, doesn’t have emotions – at least on a participating basis.  There are hundreds if not thousands of algorithms calculating in just about all markets and firing off thousands of orders to buy and sell thousands of different forex, treasuries, equities, commodities, precious metals in cash, options, futures and other forms of derivatives.  The nominal value boggles the mind but it is safe to say that talented firms and traders have the ability to step in and facilitate buyers and sellers in exchanging their dollars and keep a tidy sum for themselves in the process.

wile_e_coyote_2The ongoing discussion remains to give up the old habits of having to know the who, what, where, when and why of every move before you’ll commit to participating.  Doing this allows doubt and fear into the equation and trying to work back to “participate” gets delayed even more.  There’s always trying to cover your procrastination by attempting to “play it safe” and put a bid or offer in the market that just “doesn’t” get filled – oh well!  Breaking a habit takes 28 days or so they say.  If we consider how many days, weeks and years we have given up to our “bad habits” taking 28 days to break them doesn’t seem like such a huge price to pay.

Dictionary.com defines “probability/statistics” as:

Probability / Statistics.

  1. the relative possibility that an event will occur, as expressed by the ratio of the number of actual occurrences to the total number of possible occurrences.
  2. the relative frequency with which an event occurs or is likely to occur.

It then becomes logical to conclude that when we anticipate more than participate we dramatically reduce the probability of success and that can be statistically shown.  Learning to move beyond our “bad habits” can be acheived.  The conversation is ongoing.

 

Check out the $ES chart which covers trading from 6:30 AM to 8:00 AM PST

2016-02-09_19-24-20_S&P_$ES

 

Logical Market Update: Uranium Back on the Radar

Uranium Now Back on the Radar & Law of Supply & Demand

I spent the better part of the weekend reviewing the uranium sector.  This sector continues to probe the bottom, while the nuclear energy argument has begun to shift with more anti-nuke environmentalists transforming into believers of the benefits of nuclear power.  

Nuclear power has suffered a massive blow as a result of the Fukushima meltdown in Japan.  In a country that was dependent on receiving over 50% of its electricity from its massive infrastructure of 54 plants.  Currently only two out of the 54 nuclear power plants remains on line.  Since Japan is basically a resource poor nation it depends on energy imports and the high cost of fuel imports will make it more difficult for Japan to achieve and maintain a 2% inflation rate. 

The cost of producing energy shows that the most cost effective is nuclear, with solar being the most expensive.  When looked at in percentage of electricity produced relative to the plant capacity nuclear again leads as nuclear plants have a capacity of 90% compared to 73% for coal; 38% for natural gas; 30% for oil, 29% for hydro; 27% for wind, and 19% for solar. 

The argument for nuclear energy has several new converts with many environmentalists swinging in favor.  Here’s a main reasons why – for every pound of uranium used to generate energy instead of coal drops carbon emissions by 45,000 pounds.  Here’s another way of looking at it – a mid-sized car produces about 5 metric tons of carbon emissions a year, so every pound of uranium over coal used drops carbon emissions equivalent to that of 4 to 5 cars. 

Consider also, that current demand for uranium to power operating nuclear power plants is approximately 177 million lbs. a year.  If all nuclear power plants were to be shut down and replaced by plants the burn coal the carbon emissions added would be equivalent to putting over 700 million cars on the global roads.  Is it any wonder why more attention is being paid to uranium and public opinion is being turned more positive towards nuclear power. 

On a global scale demand for uranium continues to grow.  Here’s a news flash – don’t be fooled by the mumbo – jumbo coming out of Germany and Switzerland regarding the phasing out of nuclear power via reactor shut downs.  Both countries are now in the financing game of – you guessed it nuclear plants located outside of national jurisdictions.  Much of Germany’s electricity is wired from one of France’s nuclear power plants.  Germany can continue doing this at the moment even at inflated prices, but ultimately the powers that be will realize the necessity to keep energy demands filled by cheaper national supply. 

The caveat in the supply & demand equation is China.  China remains in the process of improving existing and building new infrastructure, which tends to skew commodity demand numbers to the high side.  The caveat here can be narrowed to the central bank of China and its determination and willingness to continue to finance projects.  Presently, China remains firm in reaching its goal to quadruple the countries nuclear capacity by 2020 through the operations of the 26 reactors under construction, which is on track to fulfill the 2050 goal of ramping up to 400 gigawatt. 

No here’s the kicker caveat in order to fuel that kind of demand, China will require 195 million pounds of uranium on an annual basis.  That is more uranium than the entire planet currently consumes.  I see a nasty ride on the supply & demand rollercoaster. 

According to the World Nuclear Association there are 433 operational reactors worldwide – the United States leads the pack with 104 reactors.  As of 2011 the U.S. uses 51 million lbs. of uranium to produce 20% of its national electric energy.  As the global leader in uranium energy supply the U.S. produces less than 4.5 million pounds of uranium annually.  This puts the United States firmly in the “demand” column as import markets begin to head higher.  When compared to oil imports, the U.S. has a greater dependency on foreign uranium supplies than oil. 

Now, for the mother of all caveats – who controls the energy?  If you have anything to do with “D.C. Beltway” you will totally get this – the oil imported by the U.S. is primarily from “friendly sources.”  

Uranium on the other hand does not share the same “favored nation” status.  Russia has quickly become the global player within the uranium supply chain and has been on a global buying spree taking advantage of rock bottom uranium prices and clearly has taken the lead in global acquisitions of uranium supply.  As of 2013 over 40% of United States uranium imports come from Russia or countries influenced by Russia. 

Ah, the smell of politics first thing in the morning!  It can really upset many sectors. 

 

Ok, the picture may be a bit murky as the hate flag continues to wave high above the uranium sector, but the trade set-ups are beginning to favor attention.  There are ETFs, Funds, and options that trade – the key take away remains finding the market that has the greatest volume.  At the moment what is available leans more to longer duration position trading using options.  If the markets draw some attention things could be more interesting for shorter durational trades as well. 

The chart below is the 5 year daily of URA – (Global X Uranium ETF) and the pattern left in place off of the April lows suggests or leaves open the potential for a retest if not new 52 week lows.  The Fibonacci Fan off of the April bottom reveals pockets of resistance the market will have to sail through if the low is to remain in place with a rally up into the Fibonacci resistance levels underway.  More importantly for me as a take away – whether uranium retests or moves to new lows the longer term path of least resistance will be up. 

URA_5YR_DAILY_FIBO_0812_2013-08-12-PROPHET

Using the Hawk Micro Scalper, Falcon Swing Trader, and the Eagle Trend Trader within the various markets can produce strong results.  Trading associated options can be used to add “beta” to an existing trade or as “the” trading vehicle.   Be sure to check out Part One  – “Options Basics and Understanding Theta is Your Friend” of a seven part series I’ve written on “Trading Options Using the Diversified Trading System” by clicking here.

 

Indicator Warehouse

Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.

The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.  

 

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

 

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

 

The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 

 

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.

 

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 

 

Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:

 

  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes

Logical Market Update: Nat Gas Surges Higher Off of Intraday Lows

Natural Gas Surges higher Off of Intraday Lows

On the Third Day of the Correction the markets gave to me…

Three parabolic earnings trades, two panic buyers and a bear pushed up a pear tree.   Interesting and yet transparent the markets moved back into cross hedging mode – what I mean by this is that time when traders look to a parallel market for direction.  Like treasury yields and the equities markets or the price of gold and the movement in the U.S. Dollar.  This type of action tends to slide around the globe from the U.S. to the Asian markets to Europe and then back to the U.S.. 

 

Tesla Motors and Groupon exceeded earnings expectations with TSLA pushing to new all time highs on Thursday.  Groupon jumped back above $10.  The other sort of parabolic move (down) was in Green Mountain Coffee Roasters, which slumped.  Overall though, the broader indexes continued to trace out “bounces” after moving lower the first three days of this week. 

 

Treasuries stood firm on Thursday and optimally will continue higher tomorrow.  The Precious Metals quickly absorbed early weakness as gold powered back above 1300and silver moved back above 20.  Mining stocks were some of the better performing on Thursday as evidenced by the 8.6 % jump in the GDX and an 8.8% jump in the HUI.  It is too early to declare these markets as having reversed just yet, but as discussed on Wednesday I am watching intently for opportunities.  Traders using the Hawk, Falcon, or Eagle platform from Indicator Warehouse and looking for tradable moves may elect to add GDX, GLD, and SLV to your roster of indexes and ETFs. 

 

The Euro moved up to the 1.34 level on Thursday with the run up being the best for trading.  Once again, the market sat in a very tight range for the better part of the session.  The Euro has pushed into overbought readings suggesting a pull back/period of consolidation is likely.  Without the markets turning lower again or the bond market resuming its decline any consolidation has been held to higher levels. 

 

Natural Gas increased its intraday range today after the EIA (Energy Information Administration) reported that U.S. natural gas stocks increased by 96 billion cubic feet last week.  Expectations were for 74 to 78 billion cubic feet.  The futures were already down heading into the report and spiked lower right after.  Support at $3.176 was breached and quickly recovered with prices then finishing up almost eight cents or 2.37%.  The momentum generated by the swift decline and surge higher gave buy signals up to and including the weekly chart (an updated chart is below.)  The monthly chart keeps alive the potential for a continued decline dropping prices to next support at $2.875. 

 

Natural Gas (Weekly Future)

NATGAS_WEEKLY_0807_2013-08-08-TOS_CHARTS

Even with additional downside potential prices should continue to rally.  More to catch up with EIA average price expectations for the balance of 2013 at $3.71 to $3.76, with average expectations for 2014 coming in at $3.95 per million BTUs.  If an additional down leg it yet to occur I would expect a rebound rally to reach back towards $3.47 to $3.55 over the near to mid-term. 

Bollinger Bandsmeasure the “high” or “low” of the price relative to previous trades and are considered a volatility indicator.  Therefore by definition prices are high at the upper band and low at the lower band.  This definition can help in pattern recognition and when combined with additional indicators help to arrive at decisions as to direction or trend. 

 

The chart below keeps in perspective just how far Natural Gas prices have dropped and the channel that should contain additional selling if a near term rally is to take hold. 

Natural Gas (Weekly Future w/Bollinger Bands)

NATGAS_WEEKLY_BOLLINGERBANDS_0807_2013-08-08-TOS_CHARTS

 

Indicator Warehouse

 

Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.

 

The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.  

 

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

 

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

 

The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 

 

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.

 

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 

 

Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:

 

  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes

Logical Market Update: Day Two – Bulls Attempt to Stage a Comeback

gold forecast

Day Two and the Bulls Attempt to Stage a Comeback – Gold Stocks Back on the Radar – Time to Begin Buying?

The markets followed through on Tuesday’s selling finishing what I’m considering the initial (first) leg down.  Interestingly though, when the bulls moved in to stage their comeback, the volatility indexes were first on the firing line.  By the close a decent bounce higher was in place.  I’m not so sure the markets are convinced though that the drop off of recent highs was just an apparition, with the bulk of the closing madness being on the sell side.  The initial leg down remains in progress and while there may be additional buying tomorrow with the potential for an up day not off the table.  Even the last minute marking battle favored the bears leaving the bulls to push the futures and ETFs after the close.  What a joy it is to know that the exchanges still have a soft spot for their larger players giving them an extra 15 minutes to hedge – yeah right!  Current parameters remain valid for the broader indexes.  Tesla, Green Mountain Coffee Roasters, and Groupon reported earnings after the close.  TSLA jumped $18, GMCR fell $6 and GPRN popped up $2.50.  The saying “Only the Good Die Young” is somehow now more believable.   

 

Bonds put in a solid rally today and managed to hold it through most of the day’s gyrations in the equity and forex markets.  Expectations remain in place for a continued recovery rally to unfold before the next leg down takes over.  Again, any clues to direction will likely begin in the 10-year note.  The Dollar got caught between a rock and hard place as the British Pound was pounded into submission after comments from the Bank of England.  The rally in the Euro was again contained to the first hour of U.S. trade with most of the action being within the European sessions.  Most of the U.S. trade was held to a slightly expanded range of 20 ticks. 

 

 

Gold and gold stocks are back on my active radar after the latest bashing brought the gold stocks to gold ratio to a long-term low, further bashing would likely lead to this ratio testing the 2001 lows.  The damage is deep across the board.  Since January 2013 gold has dropped from $1700 to $1180 and gold stocks have fallen more than 50% and that would be amongst what are considered to be the titans within the mining sectors.  Weaker companies were cut off at the knees loosing up to 75%. 

 

The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index is a modified equal dollar weighted index.  The component companies are involved in gold mining.  HUI is one of the most watched indices and retains titan status next to the XAU index.  The unhedged part of the index name is the basis for the index.  Its component companies do not hedge their gold production beyond 1.5 years.  The table below lists the current company components and their weighting.   

 

Component Companies (HUI)    
Company name Symbol Weighting 
Goldcorp Inc NYSE: GG

16.20%

Barrick Gold NYSE: ABX

15.37%

Newmont Mining NYSE: NEM

10.88%

Harmony Gold Mining Adr NYSE: HMY

5.21%

Coeur d’Alene Mines NYSE: CDE

5.11%

Yamana Gold NYSE: AUY

5.00%

Anglogold Ashanti Ltd Ads NYSE: AU

4.88%

Gold Fields Ltd Adr NYSE: GFI

4.80%

Randgold Resources Ads NASDAQ: GOLD

4.71%

Iamgoldcorp NYSE: IAG

4.43%

Eldorado Gold Corp NYSE: EGO

4.34%

Hecla Mining NYSE: HL

4.14%

Comp de Minas Buenaventura Ads NYSE: BVN

4.08%

New Gold Inc NYSE MKT: NGD

3.90%

Kinross Gold NYSE: KGC

3.85%

Agnico Eagle Mines NYSE: AEM

3.11%

 

 

 

 

 

 

 

 

 

 

The HUI Index has been hammered, as the component companies have been sold in step with the decline in physical gold.  Off of the September 2012 high the HUI has dropped 323 points (60%).   Currently 2013 has not seen any favoritism towards the HUI.  But that may be about ready to change.

 

The weekly chart below details the decline beginning off of the September 2011 highs.  The pattern in place, which encompasses the rally off of the 206.66 June 2013 low to the July high at 263, took a lot of momentum to achieve less than 60 points.  The sharp decline in the last two weeks may be the beginning of an exhaustion decline, which could set the stage for a more sustained and dynamic rally.  The stochastic oscillator has again slipped into oversold readings, but has not shown any signs of turning yet.  Currently the HUI is likely to drop to a new low under 206.66 before the next sustained rally phase takes over. 

 HUI_WEEKLY_AUGUST_07_2013-08-07-TOS_CHARTS

An additional important measure of value for gold stocks is the HUI – gold ratio.  The HUI-gold ratio is an expression, which compares the HUI index to the price of gold.  The ratio is calculated by dividing the value of the HUI Index by the price of gold.  Yes, it really is that simple – and here’s the kicker – when this ratio is very high, it correlates to gold stocks being expensive in relationship to gold.  Conversely when the ratio is very low, it correlates to gold stocks being relatively cheap relative to the price of gold.  The HUI-gold ratio bottomed in 2001 reaching a top in 2004. Progressively deeper major lows have occurred in late 2005, late 2008 and June 2013 as the bear market likely moves into its final stages.

 

Bollinger Bandsmeasure the “high” or “low” of the price relative to previous trades and are considered a volatility indicator.  Therefore by definition prices are high at the upper band and low at the lower band.  This definition can help in pattern recognition and when combined with additional indicators help to arrive at decisions as to direction or trend. 

 

The chart below keeps in perspective just how far the HUI has dropped and is likely in the finishing stages before a trend change takes place. 

HUI_WEEKLY_BOLLINGERBANDS_2013-08-07-TOS_CHARTS

It is time to move Gold, the HUI Index, and gold stocks back on the radar.  Opportunities are already presenting themselves and traders that already trade gold via one of the DTS “birds” should find solid profitable opportunities as the bear market finishes and the bull takes the reins.  I will be adding to our list below as this sector jumps back. 

 

 

Indicator Warehouse

 

Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.

 

The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.  

 

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

 

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

 

The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 

 

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.

 

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 

 

Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:

 

  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes

Logical Market Update: First Down Day – The Beginning or Buying Opportunity?

First Down Day For Equities – Just the Beginning or Buying Opportunity?

After Monday’s big disappointment courtesy of a very tight inside day, Tuesday’s trading action brought some welcomed relief.  The optimal word is some.   Refreshing is a word I heard used – It was like a fresh cool drink in the desert another contrarian trader remarked.  I prefer to remark on the increase in trading opportunities in equities, indexes, ETFs, treasuries, and precious metals.

The general mood was to the sell side, which expanded intraday trading ranges and in turn produced a jump higher in the various volatility indexes.  The S&P 500 increased the intraday range from $6 on Monday to $15 on Tuesday, most of which took place within the first couple hours of trade. 

The closing minutes of trade were again flooded with buyers coming in for varied reasons, but the important take away is that the bulls were unable to boost prices, which would raise the probability of Wednesday being another down day. 

Volatility jumped higher on Tuesday, which was expected and there is tremendous upside potential within the volatility indexes for additional gains, since most if not all of these indexes reached 52 week lows recently.  The bond market managed to stage a more solid rally led by the 10-Year Note.  Gold and silver caught a down draft on the heels of a large decline in India’s markets.  The Euro also caught an updraft and for the better part of the U.S. trading session was held to a 15 tick or less range.  The resolution of the intraday pattern suggests a spike higher with a retest of Tuesday’s high at 1.3326 before moving lower again. 

The broader indexes, treasuries, and precious metals have not moved outside of previously discussed parameters – expectations would be for a continued down move in equities, an up leg for treasuries, and additional downside for precious metals. 

Summation Indexes

Most traders are familiar with the McClellan Summation Index as measured by the MACD.  There are additional summation indexes that are tied to the broader indexes.  The NASDAQ Summation Index ($NASI) and the New York Summation Index ($NYSI).  Both the NASI and the NYSI look at the gap between the number of advancers and decliners on the NASDAQ and NYSE to give a net positive or negative number that indicates how overbought or oversold the market is on a given day. 

Many analysts use the NASI and NYSI to work the intermediate term (one to three months) trend.  Both indexes produce buy or sell signals as the NASDAQ or NYSE change directions.  The NASI can be an added signal generator for swing trades in the QQQ, and NQ futures, while the NYSI would be more of a general market indicator for trading the SPX and Dow futures and several equities. 

The following buy/sell triggers will usually determine a change in the NASI and NYSI trends:

  • MACD crossover
  • Parabolic SAR buy/sell signal
  • Stochastic crossover of 20 for a buy signal or below 80 for a sell signal

NASI (click chart to enlarge)

 NASI_08062013

The chart above shows the NASI reaching its highest level just below the 800 level last week.  Currently the NASDAQ remains in extreme overbought territory with a drop below 600 bringing the market down to overbought.  The 50 and 200 day Moving Averages are included to show the levels where a break below the 50-day would suggest a trend change.  More important to take note of is last weeks high was about 22% higher than the June 2013 high which occurred just before the NASDAQ dropped a quick 7%. 

Another observation is that the NASI has not been below the zero line at all during 2013.  A testament to the buy side momentum being very strong, however, it can also be a strong warning that the expected decline (correction) may be more severe and longer in duration than what was seen in June. 

The NYSI (click on chart to enlarge) presents a somewhat different picture:

$NYSI_08062013

 

Unlike the NASDAQ the NYSE has not blasted to new highs as registered via the NYSI.  Although the June sell off did push the NYSI into oversold readings and the break above the 50 MA gave the DJIA and S&P 500 additional fuel to power to additional new highs last week.  I would think the bulls are watching this index closely as a break below the 50 MA would likely accelerate any downside in force at the time. 

The chart below shows the S&P 500 (monthly cash – click chart to enlarge) with Bollinger Bands.

SPX_BollingerBands_08_06_2013-08-06-TOS_CHARTS

 

The SPX finished July at record highs and above the top of its monthly Bollinger Band. 

Bollinger Bandsmeasure the “high” or “low” of the price relative to previous trades and are considered a volatility indicator.  Therefore by definition prices are high at the upper band and low at the lower band.  This definition can help in pattern recognition and when combined with additional indicators help to arrive at decisions as to direction or trend. 

The chart above keeps in perspective just how far the SPX can drop before dropping into oversold readings (on a monthly basis) or before a trend change would be suggested.  It has not been a common occurrence for the SPX to close above the upper Bollinger Band on a monthly basis.  Check out the last two times this happened (2007 and 2011) to see what happened shortly after.

While I am expecting a broad market correction, I am not anticipating an over 200-point drop in the SPX, but 100 points is not out of the realm of possibilities.

The way volatility works in the markets can move contrary to what most think in that “normally” when the market moves into a period of uncertainty which can produce a increased sense of movement risk.  Upside fear is almost non existent with downside fear being the force behind most spikes in volatility and the respective indexes.

 

S&P 500 VIX Short-Term Futures Index –

 

  • Summary –
    • The S&P 500 VIX Futures Index measures the movements of a combination of VIX futures and tracks changes in the expected volatility based on 30 days forward.  The index maintains an average weighted settlement date of one month by rolling a portion of the position from the front month to the next month out, which is done on a daily basis.
    • The VIX is a measure of the expected volatility of the S&P 500 over the next 30 days.  The VIX is not a traded index, but does have listed futures and options.  The VIX futures reflect expectations for the level of the VIX on the settlement date of the contract.

 

There are several ETFs and ETNs that are tied to the VIX          :

 

  • VXX
    • The VXX tracks the VIX and offers exposure to a daily rolling long position in the first and second month VIX futures contracts to reflect the implied volatility of the S&P 500 index at various points along the volatility forward curve.  The VXX future also rolls continuously throughout each month from the front month to the next month out.
    • UVXY
      • The Ultra VIX Short Term Futures ETF looks to produce a return that is 2x the return of the VIX for a single day.  This can and has produced a situation where the returns over periods other than one day will not be as correlated to the amount or even the direction of the target index. 

 

The updated charts below of the VXX and UVXY include Bollinger Bands and show the sensitivity these indexes will have to a downside move in the broader indexes.

UVXY_DAILY_BOLLINGERBANDS_0806_2013-08-05-TOS_CHARTS VXX_DAILY_BOLLINGERBANDS_2013-08-06-TOS_CHARTS

The oversold readings within the volatility indexes and the overbought readings within the broader indexes continue to suggest a period of correction and consolidation is coming up next. 

 

 

Indicator Warehouse

 

Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.

 

The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.  

 

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

 

A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

 

The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 

 

My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.

 

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 

 

Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:

 

  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes