No, this is not a marriage proposal! In this article, I am going to talk about how we can use VantagePoint to make sense of what is going on in the markets today and how we can make money doing so.
Let’s face it: What should be up is down and what should be down is up. The kind of volatility we see in the markets today seem to make the task of trading daunting at best. Even silver and gold seem to be at odds.
How can we possibly trade in markets like these? By developing an understanding of the relationship between commodities in different categories and incorporating the data into our trading decisions. An easy way to begin is to look at the relationship between the U.S. Dollar Index (USDX) and gold futures.
As you can see by this chart, if the USDX is down, then the price of gold is up. If the USDX rises, then gold tends to fall. There are many fundamental reasons for this, chief among them being, if people have little confidence in paper currency, they will most likely purchase gold in a “flight to quality and safety.”
What does that data mean to us? Let’s say that VantagePoint gives us a signal to go long the USDX. Let’s say you have done everything I have told you to do to determine if the trade is a good one. Well, now I say, before you make the decision to go long the USDX, you should take a look at a gold chart. Use the same decision-making process you would use to determine your interest in a USDX trade. If it looks like gold is going to drop, then maybe the USDX trade is not such a bad idea.
The mistake I see traders make is, in effect, creating a synthetic spread by shorting gold and going long the USDX at the same time! Bad idea. What if we were wrong in our decision? We would lose on both trades. That does not feel good. Instead, use the method I taught you in a previous article to determine which of the two trades is strongest and makes the most sense to take.
This is a simple example of the type of intermarket analysis you should be doing today to find and make winning trades. It is true VantagePoint does a ton of intermarket analysis – way more than we are capable of doing on our own – to come up with its predictions. In times like these, we need to do a little extra leg work to get our trading right. In fact, we should make a habit of looking at several related charts in different categories before we take any trade.
Here is another example looking at crude oil and soybeans.
As you can see from this chart, oil and soybeans have been trending in roughly the same direction. However, on the face of it, we seem to have a signal to go long oil and short soybeans. Both closed down Tuesday. Would you take either trade?
Well, not with this small amount of data. But these charts should have you thinking about the relationship between grains and oil and whether or not they will continue to track in the same direction. Fundamental policy shifts seem to indicate that grains will decouple from oil.
When corn lost its glimmer as a source for ethanol, demand dropped, and so did prices. In today’s markets, we have to pay attention to the news to assist us in determining the merits of our trading decisions. Further, if I were in a Soybean trade, I would not take a Corn trade at the same time. A good rule to follow in these markets is never trade more than one asset in any given category.
Finally, take a look at the mother of all weird relationships - Gold and Oil. How on earth could Gold go up and Oil drop today? Don’t they move in the same direction? Aren’t Oil and Gold the opposite of the Dollar Index? Isn’t Oil a proxy for Gold? I have most certainly told those of you I speak with to trade Gold instead of Oil. What happened? Well, I think Oil is decoupling from Gold. Fundamental shifts seem to be depressing the price of Oil, at least in the short term.
The moral of the story is we have to keep our head up from the computer and take fundamental information into consideration. We need to be very careful in entering every trade. Before you take a trade, make sure that you have added recent world events to your decision making matrix. And, finally, do some leg work on your own to discover how markets work together or apart and incorporate that data into your trading.
Happy Trades!
Elizabeth Versace is a Commodity Trading Advisor (CTA) and blogger living in Palm Springs California. She has been studying and trading commodities for the past 12 years. She enters and exits trades using VantagePoint software exclusively and has been using the software for one year (almost to the day). She has extensive experience in testing strategies as well as familiarity with neural networks which is what drew her to VantagePoint software.
Beating up the financials
by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
The financial sector has gotten a lot of media attention lately – no surprise in light of the collapse of Bear Stearns and the most recent publicity surrounding Fannie Mae, Freddie Mac and IndyMac.
“Who’s next?” seems to be the question of the day. While misguided regulators and politicians are blaming speculators, rumormongers, high oil prices, high commodity prices and everything else for the nation’s financial ills, the root causes are getting little attention, and seemingly incompetent people heading the banks, airlines and businesses that are in financial trouble seem to be getting a free pass. They have collected millions in salaries and bonuses while jeopardizing the lifestyles and livelihoods of millions of people.
Okay, off the soapbox and to the VantagePoint charts because all of the haranguing in the world isn’t going to keep the financial drama from unfolding anyway, and it looks like there is a ways to go yet. Unfortunately, the charts aren’t very hopeful yet for those who own financial stocks or think that the stock indexes have reached a bottom and that it’s a new buying opportunity.
I am not a big fan of owning individual stocks other than what I have in IRA and 401(k) plans, which I don’t like to disrupt and regard as my long-term buy-and-hold domain. But I do follow a few financial stocks closely for overall stock market clues. The first is Lehman Brothers, which admittedly was not at the top of my list until the St. Patrick’s Day massacre but has been the focus of many rumors since the Bear Stearns debacle
After its price was more than chopped in half March 17, reaching a low of 20, Lehman rallied back to a high near 50 on May 2. It’s been all downhill since then. The predicted medium-term moving average crossover provided a good location to go short and stay short, even as Lehman bounced back after reaching the March low around 20 before breaking through that low area last week.
Now I have no interest in becoming involved in Lehman although it is a bit tempting to sell near-term $10 puts at this point, thinking there might be some recovery effort at work. But I’ll let someone else pick up the pieces. The main purpose for looking at the Lehman chart is to see how the financial carnage is playing out on one of Wall Street’s big firms.
One stock I am quite interested in is Merrill Lynch, which has been called the canary-in-the-coal-mine stock for the financial industry. While I see Lehman as an investment bank, I look at Merrill as more of an indication of what investors of all sizes are doing. And the picture is not pretty for bulls here either.
VantagePoint’s predicted medium-term crossover to the downside on May 7 after the May 2 high is a clear bearish clue as is the predicted neural index reading of 0.00. The predicted long-term difference (green line) also turned lower, but then the procrastinating trader also noted that the predicted short-term difference (red line) crossed above the predicted long-term difference and the zero line, which tends to suggest a rally. Using a little traditional chart analysis and the downturn in the predicted short-term difference to below the zero line, the logical place to sell was around 47 (red dashed line), either to get out of a stock position or to buy a put or sell a call.
Since that signal in May, both the predicted long-term and short-term differences have remained generally below the zero line with only an occasional foray above that level during the period outlined by the yellow box. These differences provide a gauge of the strength or weakness of changes in moving averages, and the indication here is definitely continuing weakness. To keep my longer-term decision-making process as simple as possible, now I am taking a closer look at that green line – be long when the line is above the zero line and short when it is below the zero line.
One of the stocks I do have a vested interest in is J.P. Morgan Chase, having owned it above 60 and below 20 over the years and watching it drop below 30 again this week. Its chart looks much like the other two charts above, and the green line again provided a simple successful indication.
Getting involved in an individual stock carries risk that the stock you select is the one that collapses – think about choosing to buy Bear Stearns stock instead of, say, Lehman, a year ago. I’m not privy to which firm, if any, Wall Street wants to savage next or what the Fed will do to salvage the next firm that crashes or what the real bottom line is at these financial institutions. So I’m also watching the financial sector as a whole in an exchange-traded fund.
The XLF ETF chart is similar to the other three charts above, but the slide from the May 2 high at 28.17 to this week’s lows in the teens isn’t as large in dollar terms, and whatever bad news there might be from the individual firm I might have chosen may be mitigated by whatever good news there is for this sector.
As on the other charts, the yellow outlined area isn’t revealing any strength in the differences of the moving averages yet so it’s a matter of keeping an eye on that green line for whenever the eventual turn may come. With what the charts show so far, it looks like it may too late to sell and too early to buy.
Darrell Jobman is Editor-in-Chief of www.TradingEducation.com , a web site providing free information and education to traders. He is an acknowledged authority on the financial markets and has been writing about them for more than 35 years.
To Trade or Not To Trade?
by Brandon Jones
I don’t know how you are feeling these days – I mean with the markets in such turmoil and all – but I can tell you that these are dog-days indeed for my style of trading.
If it isn’t the housing market crisis, it is the lack of liquidity. If it isn’t the financial crisis, it is the rocketing rise in commodity prices, particularly oil. Technology is on the out. Energy is in, sort of. I could go on, but why bore you with what you already know.
In fact, it is possible that this market turmoil is working to your advantage. Perhaps you went long commodities, or perhaps you went short the financials. In either case, right now, you would be sitting pretty, and that would show a certain amount of trading sophistication.
But what about the rest of us? The folks such as myself who develop a strategy and style of trading and then find that we can’t apply it in these tumultuous markets? Hey! Yeh! What about us?
The simple answer is, “Foget about youse,” as my Italian cousin would say. Well, as much as I wish I could disagree, I can’t. Though his vernacular is a bit harsh, he is spot-on in his message, which is: “If you can’t stand the heat, get out of the kitchen.” And that is exactly what I have done. For the second time this year, I have dropped out. My last trade was way back in June (a winner).
All of this might sound a bit piteous, but in this “throwing up of the hands,” a solid and important question is begging to be asked: “When do you throw in the towel and wait for better days?” Asking this begs another question: “How do you know when those better days are here?”
The answers, of course, rest neatly in the VantagePoint strategy you have labored over and worked so hard to maintain. Since I do not have access to your strategy, I cannot answer these questions for you. I can, however, answer them for me, which might, in some way, provide some enlightenment for you regarding your own VantagePoint trading.
For me, I throw in the towel when trading is so volatile that I am cautious about using the volatile trading strategy I developed specifically for volatile trading markets. Back in March, I wrote about that strategy and how it turned my trading around from the first of the year, but I have found that even this tailored approach to these markets is not working.
And this means? It means that when the markets begin to bob up and down like a golf ball on cement, I stop actual trading and I move to virtual trading. Simply, if I feel that the turbulence will overwhelm my VantagePoint picks, I test those picks without putting any money down. If I get two or three trades in a row that fail, I simply drop out for a few days, knowing that I will monitor the overall market environment, watching for a moment to try again. If the trial trades fail again, I stay out. If they win, I will consider getting back in with money. It is actually pretty simple, but the rewards are huge.
The most obvious reward is that my psychological state is preserved. Note that earlier I wrote my last trade was a winner. If you attempt trading in an environment in which you are uncomfortable, then you risk losing your psychological edge. I like to keep my psychological edge, so I always try to stop on a winning note. This may mean you get out too early, just as you might in a particular trade, but so what?
Don’t underestimate how important it is to have the right trading mindset. Remember, so much of successful trading is about what and how you think, rather than what the markets do. If the markets are going fine and your strategy is producing success, you feel pretty good, right? If the markets are tumultuous and you are struggling to find success, then where, exactly, is the advantage in your feeling badly?
Another big reward is that, although there is no money going in, I keep on trading with VantagePoint as if it were, all the while sharpening and honing my skills. If you are a sailor, you know there is nothing like a small storm in a secluded bay to teach you how to navigate through choppy waters. Little risk but tremendous reward in knowledge gained.
And still another reward is the fact that if I am virtually trading, I am not losing money, which means that I am following my Golden Rule: Preserving and protecting capital must always come before making money.
I guess, in summary, I would say that being a successful trader isn’t always about the actual trade. Sometimes the work and the success are found in learning to deal with harsh trading environments without risking your money. Perhaps a good analogy is that before Neil Armstrong set one foot on the moon, he had probably practiced the journey and the single step a thousand times in simulated situations.
Well, if that concept worked for him some 250,000 miles from Earth in an environment that could take his life, I guess it can work for you and me sitting in our chairs hitting keys and clicking the mice on our safe little computers right in front of us.
Brandon Jones is an entrepreneur, a writer, and an educator who happily lives on a ranch near the beautiful coast of Central California. Although not a trader by profession, he trades on a regular basis utilizing VantagePoint software. This simple act keeps him happily living on a ranch near the beautiful coast of Central California.
VantagePoint Sees More
Upside Price Action for Gold
by Jim Wyckoff
August gold futures hit a fresh 3.5-month high this week, boosted recently by a weaker U.S. dollar versus the other major currencies. Gold will continue to track the value of the U.S. dollar closely, in an inverse fashion.
A solid four-week-old uptrend is in place on the daily bar chart for August Gold. Bears' next downside price objective is closing prices below solid technical support at $950 an ounce. Gold bulls' next upside price objective is to produce a close above major psychological resistance at $1,000.
Gold traders will also need to continue to monitor the crude oil futures market. The recent record high prices in crude have supported the gold market bulls. If crude oil prices see a sustained downside correction in the near future, then the upside in gold futures would be limited. However, at present the most important "outside market" for gold remains the U.S. dollar.
VantagePoint Intermarket Analysis Software (www.TraderTech.com) is a valuable trading tool to help traders glean very early clues about potential near-term price trend changes or continuation of present trends. These near-term clues provided by VantagePoint can and do give a trader a key edge.
The VantagePoint daily bar chart for August gold futures shows the predicted 4-day exponential moving average (EMA) of typical prices two days ahead relative to the actual 10-day simple moving average (SMA) of the close. When the 4-day EMA crosses above the 10-day SMA, that’s a bullish clue.
Note also that VantagePoint’s Predicted Moving Average Convergence Divergence (PMACD) indicator is also in a bullish mode as the PMACD line and the MACD Trigger line are trending higher. Remember that "the trend is your friend" in trading markets. Trends can be plotted not only on price charts but also on technical indicators such as the PMACD.
PMACD predicts the moving average convergence divergence (MACD) one day ahead. MACD is a trend-following momentum indicator calculated by subtracting a 20-day EMA from a 10-day EMA. MACD Trigger predicts the MACD trigger one day ahead. The MACD trigger is calculated as a 9-day EMA of the MACD.
When the PMACD line crosses below the Trigger line, this predicts a possible reversal of the current uptrend to a new downtrend. When the PMACD line crosses above the Trigger line, this predicts a possible reversal of the current downtrend to a new uptrend. Another crossover indicator occurs when the PMACD crosses above or below the zero line.
PMACD can also be used as an overbought/oversold detector when it pulls away from the Trigger, suggesting the price of the market may be due for a correction that will bring the averages back together. PMACD can also be used to spot underlying strength or weakness when its movement diverges from the movement of prices.
Finally, VantagePoint's Predicted Neural Index (PIndex) is presently reading 1.00, suggesting still more upside for August gold in the near term.
When the predicted simple three-day moving average value of typical prices is greater than today’s actual three-day moving average value, the Predicted Neural Index is “1.00,” indicating that the market is expected to move higher over the next two days. When the predicted simple three-day moving average value of typical prices is less than today’s actual three-day moving average value, the Predicted Neural Index is “0.00,” indicating the market is expected to move lower over the next two days.
The PIndex is a proprietary indicator that is either correct or incorrect so its performance can be measured in terms of percent correct to produce the accuracy statistics cited for VantagePoint, which has a predictive accuracy rate of around 80% across a wide range of markets and time spans in ongoing research.
Jim Wyckoff is the senior market analyst with www.TradingEducation.com . The site is dedicated to helping traders at all levels learn their craft better so they can improve their odds for trading success. The site focuses on current market conditions as well as a variety of educational materials that will give traders of stocks, currencies, futures and options sound background information about trading and important trading concepts. Jim has spent nearly 25 years involved with the stock, financial and commodity markets. He was a financial journalist with what is now the Dow Jones Newswires service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, he has covered every futures market traded in the U.S., at one time or another. Not long after he began his career in financial/commodity market journalism, Jim began studying technical analysis. By studying chart patterns and other technical indicators, Jim realized the playing field could be leveled between the "professional insiders" in the markets, and traders/analysts like himself. As a proponent of Intermarket Analysis, VantagePoint Intermarket Analysis Software is one of the tools in Jim’s tool-box.
Going for the Gold
With an ETF
by H.U.
Part I
Like other commodities, gold has experienced price rises over the last few years. This article will show you how to use VantagePoint to understand the movement in the price of the gold exchange-traded fund (ETF), allowing you to trade profitably in the short and long term, and will also explain why gold is a good long-term investment to hold with other assets in an investment portfolio.
The StreetTRACKS Gold Trust ETF (stock ticker GLD) is an investment that aims to mirror the performance of the price of gold bullion, less the trust’s expenses. The trust holds gold and is to issue baskets in exchange for deposits of gold and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold when necessary to pay trust expenses or if the trust terminates and liquidates its assets or as otherwise required by law or regulation.
The trust is not managed as an active investment fund, and it's not registered as an investment company under the Investment Company Act of 1940. The fund manager of GLD is State Street Global Markets, LLC, which has net assets worth US$19.26 billion. The fund’s inception date was November 18, 2004.
The two-year VantagePoint chart of GLD below makes it obvious that gold has been in a long-term uptrend.
If you look at the one-year VantagePoint chart of GLD below, you can see that GLD has just come out of a consolidation period from March to May of this year, where the Predicted Long-Term Difference line dropped below –3 on two occasions in April and May (a bearish indication) but is now at around +2 (bullish indication).
If you look at the six-month VantagePoint chart below, the Predicted Stochastic line (black line) is above the trigger line (blue line), and the Predicted MACD line (black line) is also above the trigger line (blue line) which are bullish signals. However, the Predicted Stochastic line is above the upper threshold of 80, the Predicted RSI line is above its upper threshold of 70 and the Predicted MACD line is at its high end of its range at around 2. All of this means that, in the very short term, GLD looks to be overbought and will very likely correct before resuming its uptrend.
Also, although the Predicted Long-Term Difference line (the navy blue line) is moving upwards, the Predicted Short-Term Difference line (the bright blue line) is moving downwards and has just crossed below the Predicted Long-Term Difference line. That is a bearish indication.
What happens next in terms of the price movement of GLD will depend on whether it surpasses its previous peak of $99.17, which was reached on March 17. If it does surpass this peak, it may be a signal that there will be a continuation of the upward trend in GLD. So the thing to watch is for GLD to move past the previous peak of $99.17. If it does convincingly, there may be room to move upwards further.
Gold is a good long-term investment for various reasons:
1. According to certain analysts, gold is cheap even now compared to its previous peak in 1980 of $850 per ounce when this price is inflation-adjusted. The nominal price of gold today is only slightly higher than $850. Not many investments (more like none) are priced now as they were 28 years ago.
And inflation has been eating away at the dollar over the last 28 years, which means that due to depreciation, the U.S. dollar is worth a lot less than the dollar 28 years ago. Based on inflation, gold would have to trade above $2,000 an ounce to match its 1980 peak. Compared to this inflation-adjusted figure for gold, the current price of gold around US$973 per ounce looks cheap indeed.
Since 2001, gold has outperformed stocks, bonds, and just about every other investment, even though gold produces no yield and no cash flow. For such a strong investment performer such as gold, only 10% of worldwide demand for gold is for investment purposes. However, this situation will not last long.
Globally, entire gold markets that didn’t exist 28 year ago are now beginning to see the value of gold and have begun buying the precious metal. Vietnam started trading gold futures in June 2007 and already the exchange trades around $100 million in gold futures a day. China’s Shanghai Futures Index started trading gold futures in January of this year and already China has surpassed the United States as the second largest consumer of gold behind India.
Gold is a great inflation hedge. However, due to the growing number of gold investors, it’s going to be a great investment simply due to supply and demand. Even though $2,000 gold may sound ridiculous at the moment, we should remember that $1,000 gold sounded ridiculous just three years ago. That price was reached earlier this year.
2. Governments will depreciate paper money to pay off their record debts by printing money. However, they cannot create more gold. The supply of paper money can be infinite, but the supply of gold is extremely limited (it is speculated that the entire gold production in the history of the world could fit on the basketball court at Madison Square Garden).
3. Gold should do well during major global conflicts. While the price of gold was fixed during World War I and World War II, silver prices rose by over 100% in both world wars and during the War on Terrorism. The reason why previous metals do well during conflicts and wars is because governments ultimately print money to pay for wars.
4. Gold should do well in extreme bear markets. Silver as a precious metal more than doubled in value from 1932 to 1936 during the Great Depression (the price of gold was fixed by the government). The next long bull market was from 1968 to1980 when silver rose from around $2 in 1968 to a peak near $50 in 1980.
5. Gold will rise during inflation or deflation. Investing in gold is good inflation protection because gold prices rise as currencies depreciate. Gold and gold stocks will do even better during deflation, as the government lowers interest rates significantly and wildly prints money to offset the effects of deflation, which ultimately leads to higher gold prices.
6. When you buy gold investments, you lower risk in your investment portfolio because gold is not correlated with other investment classes. In the past, gold has tended to move in the opposite direction to stocks – for example, gold prices skyrocketed in the 1970s when stocks did terribly. Then in the 1980s and 1990s when stocks soared, gold lost over half its value. Now in the new century gold prices have soared while stock indexes are only around 2000 levels. By holding a portion of your portfolio in gold and gold stocks, this will smooth out your portfolio fluctuations.
Part II: An in-depth look at the history and culture of gold, the features of gold and the demand and supply of gold.
H.U. has worked in funds management and has been trading in stocks for over 5 years. She is currently a postgraduate research student at a university and specializes in US stocks, ETFs, currencies, and overseas stocks focusing on commodities. As a proponent of Intermarket Analysis, VantagePoint Intermarket Analysis Software is one of the tools in H.U’s tool-box.
Let’s get related!
Beating up the financials
To Trade or Not To Trade?
VantagePoint Sees More
Upside Price Action for Gold
Going for the Gold
With an ETF
