I mentioned Thursday I thought silver was going to break out of this massive bull flag pattern.
This is what it looks like today.
I am beginning to sense the urge from some traders to sabotage good positions we have in our stocks and metals portfolio. The fight or flea instincts in us is strong. So is recency bias. What makes humans different from other creatures is that we have the ability to overcome these tendencies through practice and self-discipline. Most traders don't realize they are making bad decisions at the moment, but they tend to make them over and over and over. This is why cycles work. They reflect human flaws in our trading. This is what creates patterns. My role here is to try to keep you in winning positions to maximise the potential of a cycle while you are battling your instincts.
Occasionally, these cycles become disrupted, but the disruption itself is part of a pattern that repeats. I posted this chart on Whatsapp yesterday of a disruption called the short squeeze which happens over and over and over.
The short squeeze is simply the function of a market when price begins moving against short traders. At first, the big boys decide that they have pushed price as low as they can and decide that they could take their gains and invest them elsewhere that has more profit potential. This is not like the stock market where you just exit your position. You don't sell to get out. If you are short you have to buy your way out so they buy. This triggers the next wave of buying which is stops getting triggered. Just like we do with our long trades, many short traders use protective stops and when those hit it triggers more buying. The next wave of buying happens when astute traders realize there is buying happening and they decide they want to be long, so they start buying. Then you have your trapped short traders who are being hammered by margin calls who are running out of money and they are willing to buy at any price to get out of their short trades. They felt the squeeze.
Then there is us.....the dumb money traders who sat on the sidelines when the buying was good and start thinking..." Maybe I will buy me some silver". At this point, who do you think is willing to sell this group of traders their silver? The shrewd traders who bought at the bottom. They will be more than willing to sell us all their shares at the top and we will be enthusiastic when we buy them. If we feel comfortable when we buy it is already too late.
The measuring target for the bull flag is around the $20.50 mark. This move will be very close to the 2016 high. This move is powerful enough to get there in another 4-6 weeks.
This move will NOT be a straight line. I think we could see even more volatility than we have seen. This is done by the market makers who see an easy way to steel the positions of frightened traders. I will be pushing stops above the entry price of most in our group very soon, but I will be recommending lose stops for a while. Once the stop moves above 19 I may begin tightening somewhat. If you have multiple positions I can make some positions tighter while keeping some positions looser. Exiting will be an individual decision for the most part but if we hit $20 I will have the stops very tight.
One other pattern most of us are beginning to recognize is that the bullion bankers are determined to keep the price of gold in check. WE should be expecting a hit maybe Sunday night or around 9:00 Monday morning. If/When this happens we do not need to be doing anything except sitting on our hands. It is not a change in trend. It is not an end of the rally. If you do anything at all you should be thinking of this as a dip to buy.
Have a great weekend!
Gold survived today's options expiration relatively unscathed. Gold dropped right down to the top of the triangle on day 13. This pushed the 3 day RSI oversold which probably makes this our half cycle low. I would say that gold should again challenge 1800 over the remainder of this cycle which is 100 points away.
If you bought gold now, I would be putting you into the August contract which is presently trading 25 points higher than the June which expires Friday. This means a move to 1800 would be worth 75 points with each point being worth $100, so the profit potential here is $7500. If you place the stop at 1700 you are risking $2500. This gives the trade a 3X1 reward to risk ratio. Don't forget that there are also micro mini futures contracts for gold that are 1/10 the size.
I still believe gold's under appreciated cousins Silver and Platinum will outshine gold this next daily cycle. Silver in particular tends to perform better than gold late in the intermediate cycle. I already have July Silver and Platinum positions but may add here.
Because we would be buying into a chop instead of a swing low, I am aiming for the bottom of that trading range. I am buying SI at the 10 day moving average of 17.25 and the 10 day moving average for PL at 855.
Silver is worth $50 per penny. I think a silver will reach $18.50 to $1875 before this cycle tops. If you can buy silver at $17.25, you have the potential for a 125 cent gain. Each penny on silver is worth $50. This trade has the potential to gain $6250 and maybe more. We would keep the stop at $17, so you are risking 25 cents or $1250. That would be a 5 to 1 reward to risk ratio. The margin for a silver contract is $9900 but there is a micro silver contract that is 20% the size and margin.
I think Platinum can reach 1000 by the end of this cycle. If you are able to get a PL fill at 855, you could capture a 145 point move. Each point for a PL contract is worth $50, so a PL contract has potential for a $7250 gain. The stop would be set at 840, so you would be risking 15 points, or $750. This would give the trade a 9.5 to 1 reward to risk ratio. That seems kind of out there but the numbers are the numbers.
The margin on a PL contract is $4950 which is much lower than gold and silver. You could buy two PL for the same margin as a silver and probably make twice as much on the trade. For this reason, I am leaning very hard towards the platinum. You never really know what is going to happen cycle to cycle so I like owning some of each. I would tend to favor PL the most for the remainder of this cycle, followed by Silver then gold.
Remember, this is buying Aujgust Gold at 1725, July Silver at 17.25 and July Platinum at 855.
Most people are familiar with the stock or equities market. A broker who serves that market is called a Series 7 broker. The commodities markets for which we are trading in are served by Series 3 brokers like me. The markets are separate but obviously if we are trading S&P and NASDAQ index futures there is some cross over. You cannot buy gold on the equities market, but you can buy exchange traded funds (ETF's) that buy gold futures. GLD is the largest of these ETF's. There are also ETF's you can buy which follow gold that actually buy gold mining companies. The large companies are held by an ETF called GDX. the small mining companies which have more of an exploratory component to them are in an ETF of Junior minors called GDXJ. You can buy these through a stock broker and put them into your IRA.
We got a warning on Wednesday when GDXJ showed us a shooting star candle. These candles indicate exhaustion in the market. The market just runs out of buyers. These are reversal candles. GDX closed lower but did not shout the warning GDXJ did.
A second layer of ETF's are called Inverse ETF's. If you think a sector is about to go down, you can buy these ETF's and profit from the move down. Another group of ETF's have a leverage component to them. You can buy ETFs with 2X leverage and 3X leverage. A 5% move in an underlying EGF can give a 15% move with a leveraged ETF.
There is a populer leveraged inverse ETF with the stock symbol DUST. They had a good day Wednesday as the gold mining ETF's sold off.
This is still easy to overlook, but seeing the weekly DUST chart I am suddenly concerned.
Doubts are beginning to creep into my mind. If the banksters really want to keep metals contained, they can't lose the 1800 area. Given the volume of buying on the inverse ETF's, I am growing worried. Maybe it will take longer to get through 1800 than I was thinking. I was hoping we could get through it and challenge the all time highs before this daily cycle was done, but if the bankers are successful turning the metals lower then it could be next fall before we get there.
I am not giving up on our metals trades, but I am needing to figure out how to get us in the right position. At this moment, gold is sitting right on the 10 day moving average. Silver and Platinum are still quite a bit above the 10 dma. I like to leave the stops lose at the beginning of a cycle and tighten them later. I think at the very least we need to tighten the stops to the 10 dma so I am tightening all stops on silver and platinum positions before the market opens Monday evening to 16.80 silver and 830 platinum.
Just to be clear, I am still bullish the metals and believe these trades can be enormously profitable. If not, I would just recommend exiting out. I am just exercising some caution here. We recovered a lot of Thursday's take down on Friday and maybe that is all there will be, but there could be a war at the 1800 level. It could be we just have a horrable grind for a while. Once we break through 1800 I think we are off to the races.
One other consideration you can make.....and it has to be your call is to just take down some leverage. If you have several contracts, you could take profits now on some of them and keep just a small amount in the game. I cannot say right now when I will be recommending another metals trade if we get out or get stopped out now.
While stocks are only into day 6 of it's cycle, it does face a potential problem and that is Nancy Pelosi and the Democrats. They have created a stimulus bill full of green energy and non economy related things that has no chance of passing the senate or being signed by the president. They wish to make a statement to use for the election with this bill instead of actually making it easier for the country to open up. If this bill is not modified, I think we could see stocks left translate and begin a rather strong sell off.
I still believe if a reasonable bill gets passed we will see stocks back at new all time highs in short order but this bill could be a major sticking point. Unless I hear otherwise from you, I will be raising stops on your NQ positions to 9200. If you have different stock trades than the ones I have recommended, you need to determine how the best way is for you to manage this risk.
If we get stopped out at this stage we may be in cash for a few weeks or a month. I have pretty much stopped recommending anything besides stocks and metals the past few weeks and expect this to continue until some sort of normalcy returns to the market place.
Ordinarily, the stock market has the easiest cycles to map. After a crazy first few months of the year, stocks have settled back into normal looking cycles. This is why we were able to enter near the bottom, exit near the top and re-enter again on day two of this new daily cycle.
The chart below is the current chart of the S&P 500. The shaded area was the previous daily cycle. I made the first buy recommendation on March 24 which was actually day 1. This won't happen very often. It will usually be day 2 or 3 when I recommend buying due to a swing low. On April 21 we got our half cycle low. Most daily cycles will have a HCL. We are able to connect a trend line with the lowest most point of the previous cycle to construct the daily cycle trend line. The daily cycle trend line is important as it marks the moment stocks begin their decline into a daily cycle low. It was at this moment when we exited our stocks. We were in and out once but we captured 95% of the first cycle.
We bought again on day 2 of the second daily cycle on May 17. We are now in the advancing stage of a daily cycle and today is day 4.
My expectation will be this. Just as during the previous cycle stocks will have a half cycle low. It most likely won't last but a day or two so timing this exit and re-entry is probably futile. I am going to wait for the HCL to occur and recommend we add to our positions at that moment. We will then raise our stops up to where the bottom of the HCL and ride up the second half cycle. We will be raising our stops on this cycle almost daily. When we are a week away from timing band for the next daily cycle low we will just exit near the peak.
If we agressively raise our stops now, we will get taken out of the trade and will have to decide when and how to re-enter. The odds of hitting this right are just too slim to risk in my opinion. I am willing to hold out for a few days of pain at a HCL than have to deal with the emotional stress of trying to figure out the right moment to re-enter.
The chart above is just for an illustration to demonstrate the trajectory and not a projection. Below is a realistic projection for this cycle. There is a gap to fill around the 3330 area. Once we break above the 200 day moving average, I don't see anything that could serve as resistance until we get to that gap.
If the S&P rallies over 800 points, I think we will see the NASDAQ at all time highs, topping around 3200 to 3300.
So my plan is this. I don't want to muff this opportunity up by trying to jump in and out along the way. I am going to use the dips as buying opportunities and reasonable places to raise stops along the way.
I wrote about corn April 24 and suggested that would be a terrible time to sell corn. I really encourage you go back and read it again. Corn had bottomed on April 21 and sentiment was at the lowest levels since November 2017. I was not picking a bottom.... just saying that you should not be selling corn at that time. I think there are signs that the corn market is about to turn.
The commitment of traders report which was released on Tuesday shows that the "smart money" hedgers have moved to a multi-year long position in corn. They are now holding more than 10% of the open interest net long, which has preceded an average return of 11.2% six months later. Notice the relationship between the hedgers net long positions at extreme and price. There are more long positions held by corn hedgers now than at any time since 2013.
As for the timing, the reversal could probably happen any day. You can see the coil happening inside the triangle for new crop corn. Looks a little like gold doesn't it.
So no, I am not recommending we trade it but if you are growing corn or still have corn in the bin, I would not be selling it yet.
I am expecting stocks to continue lower this week as we are nearing the timing band for the first daily cycle low of this new intermediate cycle. There is a jobs report Friday which could mark the bottom of this cycle. Until then we have no signals that it is time to buy.
Gold appears to be trading in to a triangle. A triangle is just a sideways consolidation. It is not a drop in price so much as it is time that creates the break of the daily cycle trend line so the RSI may not get pushed into the oversold area as a result. The 1700 area has served as strong support over the past month as price has tested that area twice and support held both times. Technically speaking, we have broken the daily cycle trend line and the 10 DMA has turned down which we need as a bare minimum to say we got our daily cycle low.
Once the price of gold gives us a swing low, I am going to call this as a daily cycle low and recommend taking a position. This could happen as early as Monday. If the price of gold can move above 1715 we will have our swing. The next confirmation will be a close above the 10 day moving average. The next confirmation will be a break out of the triangle which would be around 1733. I am going to buy at the swing at 1715. This could be as early as Monday.
1800 is a long term resistance area dating back to 2011. Once the price of gold breaks out above 1800 there is no resistance for gold until it reaches it's all time high of 1923.
Margin on a gold futures contract is 10,065 per 100 troy oz contract. Every dollar gold moves is worth $100, so a move from 1715 to 1800 is a 85 point move worth $850. A move to the all time high of 1923 is 208 points. 208 points X $100 means this move will be worth $20,800.
There are micro mini gold contracts which are 10% the size of the gold contract, just like there are micro mini contracts for stocks. If the full size contract is more than allows you to sleep at night, then just opt for several micro contracts. No need to make this hard on yourself.
I am getting asked A LOT why we are not trading crude oil. It is my opinion that the crude oil market is severely broken. What is even scarier to me is the systemic risk to the financial system that this poses. I am not an expert on the oil industry, but if you listen to this it should make you concerned. This was recorded this past Sunday evening.
As always, trade at your own risk.
The Speculation page is used for educational purposes and to talk about current trades we are in. The Pit is where we post new trade recommendations. This is also a blog page where you can ask questions, post your thoughts or ask for help. Be sure to use an anonymous name as you may not want your neighbor knowing what you are up to.