Recent price action in the stock market has many traders on edge. With the
market closing below our key support trend line last week, the market has now
technically starting a down trend.
While trend lines are a great tool for identifying a weakening trend and reversals
in the market, I do not put a lot of my analysis weighting on them.
Most of my timing and trading is based around what I call INNER-Market
Analysis (Market Stages, Cycles, Momentum and Sentiment). Using these
data we can diagnose the overall health of the market. Knowing the strength
of the market we can then forecast short term trend reversals before they
happen with a high degree of accuracy.
In this report I keep things clean and simple using just trend lines. During
the last three weeks we have seen the price of stocks pullback. And because
2013 was such a strong year for stocks most participants are expecting a sharp
market correction to take place anytime now.
So with the recent price correction fear is starting to enter the market and
money is rotating out of stocks and into the Risk-Off assets like gold and
bonds.
Stocks tend to fall in times of economic uncertainty or fear. These same factors
push investors towards the safety trades (Risk-Off) high quality bonds and
precious metals. As more money goes from risk-on to risk-off, stocks will continue
to fall and the safety trades will rise. The move by investors to select the
safety of gold and bonds compared to the volatility of stocks will result in
these risk plays to moving in opposite directions.
Let's take a look at the chart below for a visual of what looks to be unfolding...
How to Trade These Markets:
While these markets look to be starting to reverse trends, it is critical
that we understand how the market moves during reversals and understand position/money
management.
Getting short stocks and long precious metals in the long run could work out
very well, but if you understand the price action that typically happens during
reversals you know that the stock market will become choppy and we could see
the recent highs tested or possibly even a new high made before price actually
starts a down trend. And the opposite situation for gold and bonds. Drawdowns
can be huge when investing and why I don't just change position directions
when the first sign of a trend change shows up on the chart.
Price reversals are a process, not an event. So it is important to follow
along using a short term time frame like the daily chart and play the intermediate
trends that last 4-12 weeks in length. By doing this, you are trading in the
direction of the most active cycle in the stock market and positioned properly
as new a trend starts.
What I am looking for in the next week or two:
1. Stocks to trade sideways or drift higher for 3-6 days, then I will be looking
to get short. Again, cycle, sentiment, and momentum analysis must remain down
for me to short the market. If they turn back up I will remain in cash until
a setup for another short or long entry forms.
2. Gold remains in a down trend but is starting to breakout to the upside.
I do have concerns with the daily chart patterns for both gold and silver,
so next week will be critical for them.
3. Bond prices (not yields) look to be forming a bottom "W" pattern. They
have had a big run in the last few weeks and are now testing resistance. I
think a long bond position is slowly starting to unfold but if we look at the
futures price charts for both bonds and gold, they have not yet broken to the
upside and have more work to do. As mentioned before ETFs are not really the
best tool for charting but I show them because they what the masses follow
and trade.
Get these reports every week free at: www.GoldAndOilGuy.com
Author of "Technical
Trading Mastery - 7 Steps To Win With Logic"
