Silver is the ultimate hedge against U.S. Dollar deflation — ya, right!!

 

A picture tells a thousand words.

$SLV $SI_F

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Merry Christmas — Gold could be heading to substantial new all-time highs

 

The charts suggest a better than 50/50 chance that Gold prices will far exceed the present all-time high — in Swiss Francs that is.

In the U.S. we view Gold in USD terms. And, as a general rule, Gold (and Crude Oil) are globally quoted in USD. Yet, substantial investors in other countries view Gold in terms of their own currency. This makes sense. If Gold is the ultimate store of value, then it is a store of value relative to any and all currency units.

While Gold prices have retraced sharply in USD terms, the same cannot be said of Gold priced in other major currency units.

First, the chart of Gold in US$. It might be observed that Gold has broken through its 31-month trendline and, on a closing price basis, penetrated the September low. Arguably, the historic bull trend in Gold priced in US$ is being threatened.

The same cannot be said of Gold priced in terms of other currency units. 

First, let’s focus on Gold priced in Swiss Francs, which is a logical currency to examine considering Switzerland’s historic connection with Gold.

Remember that any trade in Gold, in any currency, represents a spread. If you go long Gold in the U.S., you are spread long Gold and short US$. If a Swiss investor buys Gold, the trade is long Gold and short $CHF. The proper way to express this spread is Gold/CHF, or GC/CHF.

The bull trend in GoldCHF shows no signs of a top — in fact, the trend is accelerating as shown on the weekly graph below.

The daily Gold/CHF graph shows that the spread is forming a well-defined symmetrical triangle. Remember, the probabilities are always better than 50/50 that a period of consolidation will become a continuation pattern, not a reversal pattern. So, the odds favor an upside breakout of this pattern.

It is important to note that the GoldCHF chart is closer to the bottom boundary of the triangle than to the upper boundary. If this present coil is to become a symmetrical triangle two events must occur.

  1. Prices must hold the lower boundary.
  2. Prices must advance out of the upper boundary.

The completion of the symmetrical triangle would establish a target of CHF1850 per ounce. This represents an advance from present levels of more than CHF300.

The chart of Gold/Euro also shows a healthier trend than the chart of Gold priced in Dollars. The Gold/EUR daily chart is also forming a symmetrical triangle pattern.

The Gold/CHF trade can be done in at least two ways for a flat price trader. Options traders have an infinite number of alternatives.

Futures/forex

Buy a contract of Comex Gold futures (current value about $161,000) and buy $160,000 of $USDCHF in the forex market. Remember, buying the USDCHF is the same thing as going short the Swiss Franc.

As an option, you could buy a mini contract of Gold (present value about $53,000) and buy $50,000 of $USDCHF. If GC/CHF moves from the present level of around CHF1505 to the target of CHF1840, this trade would yield a profit of CHF335 per ounce. Using one mini Gold contract, this converts to a profit of approximately $11,800. Of course, a profitable trade requires the right direction and the right timing. I am not suggesting that today is the right timing. You need to determine timing based on your signal guidelines.

ETFs

Buy 200 shares of $GLD (present value about $31,200) and short 300 shares of $FXF (present value about $31,500).

Caveat

Of course there is a caveat to this analysis. The continuation patterns cited have not yet been completed. There is nothing that says the present congestion in Gold/CHF will not become a double top or rally to the upper boundary, fail, and form a 5-point reversal symmetrical triangle top.

One more caveat — I presently have a post highlighting the chart reasons for $25.60 Silver (see here). So what is it — a drop in Silver of an explosive rally in Gold? No doubt some Silver bull will point out the inconsistency. The reality is that both scenarios are not likely to come true. I am not sure which one — if either — will bear fruit. The very idea of a bullish review of Gold and a bearish review of Silver is only something a true trader can understand. I understand that a Silver bull would not get the nuance of this concept. That’s ok. I am a trader and a Gold bull in the very long-term. I could care less what Silver does. I respect thoughtful Silver bulls.

Disclaimer: I am presently short Silver as a trader. I presently have a profit. I have a protective stop locking in a part of that profit. I could be long next week — another idea precious metal bulls cannot quite grasp.

Markets: $GLD, $GC_F, $FXF, $USDCHF, $G6S_F

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Gasoline prices are ready to ignite

 

Heating Oil and Gasoline are poised for a possible price explosion

There is an old adage in the commodity markets — “A market that won’t go down will probably go up.”

This adage applies to Heating Oil and RBOB Gasoline. Despite bear trends in many of the commodity raw material markets in recent months, the Crude products have been unable to establish bear trends.

The weekly and daily RBOB Gasoline graphs display 8-month bull wedge patterns. The nature of the decline from the May high has not been impulsive. This is an indication that the bull trend from the late 2008 low is not over. Depending upon how one draws the boundary line from the early May high, the market is quite close to a breakout.

The weekly Heating Oil chart shows even more resiliance and appears ready for another significant leg up in its bull trend.

There is a pure ETF play in the Gas market. UGA displays a solid line of support at $45. This level provides a logical spot for protecting a long position.

Markets: $HO_F, $RB_F, $UGA

 

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Silver H&S and flag point to 25.60

 

Charts produce double confirmation of a move to 25.03 to 25.60

There are four dominant technical characteristics on the Silver chart. A dominant technical characteristic is, in my way of charting, the pattern that is driving an underlying trend.

First, the market is still influenced by the blow-off top last April and May accompanied by unprecedented volume (read: “distribution of ownership”).

Second, the Silver market has an established downtrend on the daily chart. All longer-term moving averages are down. The market has formed an 8-month down channel.  Anyone who purchased Silver since February 2011 has a loss.

Third, a 10-week H&S pattern was completed on December 13. This pattern has a target of 25.60.

Fourth, the market appears to be forming a brief 6+ day flag. Here is how Edward and Magee define a flag:

“A flag looks like a flag on the charts….the picture is naturally turned upside down in a down trend. It might be described as a small, compact parallelogram of price fluctuations, or tilted rectangle, which slopes back moderately against the prevailing trend.” [E&M, 5th Edition, pgs.168-173]

Flags tend to be “half-mast” configurations. If this flag serves a half-mast function, the distance from the Dec. 8 high to the Dec. 15 low should be duplicated downward from the Dec. 31 high. This would produce a target of 25.02.

Of course, this flag could be extended in height or duration or could even morph into a different probably continuation pattern. An  advance above the Dec. 14 high would be the first indication of major morphing.

$SI_F, $SLV

 

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Three reasons to be bullish on Wheat prices

As I see it, buying Wheat is starting to look like a lay up trade

Chicago Wheat prices are at or near an all-time record historic low relative to Corn prices. Wheat is a replacement for Corn in animal feed, particularly for chickens and hogs. Seldom in history has Wheat sold at even money to Corn. It never stays there long. Keep in mind that we are in a unique period of history in this relationship because half the Corn crop is now used for ethanol.

The chart above is the quarterly chart of Wheat vs. Corn dating back to the 1970s. The chart below is the daily graph of the spread, showing the chart is forming a very well defined tradable symmetrical triangle bottom.

In the commodity business there is an old saying: “Nothing cures low prices like low prices.”

The daily Wheat chart displays a multi-month falling wedge pattern. The rule on wedges is pretty simple:

  • Rising wedges should breakout and move away quickly and dramatically.
  • Falling wedges breakout and normally retest several times, sometimes even making  a new low in the process.

Traders should be alert for the completion of the falling wedge, but long positions should not be played too tightly.

There is one final reason to think the Wheat market will soon bottom — COT data. As shown below, the commerical has NEVER been as long Wheat as currently, with a net long position of about 375 billion bushels. The commodity pools and large speculators are short a near-record 150 million bushels.

A primer for futures traders: Minneapols Wheat (hard Spring), the highest quality, is used to make pasta and specialty products; Kansas City Wheat  (hard red) is used for break; Chicago Wheat (soft spring) is used for crackers.

$ZW_F

Thinking through the trading process — time phasing, risk management protocols

 

Sound boring? It probability is. But my experience is that trading is a never-ending repetition of mundane activities. Successful trading is paying attention to details. Again and again! Never ending! No shortcuts!

Factor LLC (a proprietary trading firm) maintains lots and lots of metrics and lots and lots of models. We treat our trading like it is some kind of lab rat or experimental rhesus monkey, always being poked and monitored.

The results of our modeling and metrics over the past 18 months may surprise you – they have surprised us. This post examines several interwoven concepts: time phasing, modeling, metrics and money management strategies.

At Factor LLC we identify signals based on several variables, including:

  • Is the signal based on a weekly or daily graph?
  • Is the signal a reversal or continuation pattern?
  • How long is the pattern in duration? (Our categories are 0-2 weeks, 2-4 weeks, 4-6 weeks, 6-8 weeks, 8-12 weeks, 12-18 weeks, 18 weeks or longer)
  • What is the pattern (H&S, triangle, etc)?
  • Is it a completed or failed pattern?
  • Is the signal a breakout, a retest, an instinct or anticipatory signal?

We maintain a grid containing all the types of signals we would consider tradable. We may decide to forgo a certain type of signal for a period of time based on our overall read of the trading environment. For example, we are presently taking risk position only in continuation patterns at least 6 to 8 weeks in duration and reversal patterns at least 10 weeks in duration. We are excluding diagonal patterns from our rotation and limiting anticipatory signals.

My longer-term strategy is to move Factor almost exclusively toward completion signals with extremely long-duration patterns.

Additionally, once a signal has been given we employ one of several money management protocols. Some of the variables include:

  • Leverage employed as a % of total trading capital
  • Riding a position to a target or maintaining the initial stop loss
  • Advancing a trailing stop based on a precise numeric protocol
  • Taking a quick profit immediately after a price thrust – within two to four days of trade initiation, despite the signal profile
  • Using a trend proxy to manage the trade
  • Jamming stops quickly or exiting a trade when it blinks the wrong way

We maintain constant modeling of all signaling and money management alternatives, whether or not we are taking trades in the signaling category or using the money management protocol. Sometimes we guess right on how the markets will respond to our various alternative trading tactics, sometimes we guess wrong. Guess what? – welcome to trading! We live with two constant realities:

  1. Our exact employed signaling and money management profile will always be out of synch with the markets to some degree.
  2. We will always have too much leverage in the bad trades and too little leverage in the really good trades.

Again, welcome to trading. A trader makes a decision, steps to the line, places a bet, and lives with the outcome. Pretty simple formula, really.

Here are the protocol combinations that have been most consistently profitable in the past 18-months, quite contrary to our predisposition:

  • Short duration patterns (2 to 4 weeks ind uration, continuation or reversal), often within larger pattern construction, taking profits quickly, within a few days.
  • Long duration patterns (12 weeks or longer), taking profits quickly, within a week or so.

The irony of the above is I tend to be outspoken against shorter-term trading. My personal instinct is to move toward long holding periods with long-duration signals. Go figure! So, here is our dilemma: We have seldom employed these combinations of signaling and money management protocol. So, what do we do? Do we rearrange out combinations in response to what has worked best the past 18 months or do we move forward our plans to adapt the “long-view” strategy?

Decisions, decisions, decisions!

What we are sure of is this – to be a consistently profitable trader, you must know as precisely as possible what a signal is or is not for you and what precise trade management protocols are in your bag of tricks. If a trader comes into a trading day wondering whether such and such a market is a buy or a sell, this is a sure sign the trader has not done enough thinking about his or her signaling process.

Anyway, these are my thoughts for the day.

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A zany announcement: I sometimes change my mind about markets

 

This blog has many new readers. This post is written for you.

Context is everything. The purpose of this post is to provide you with a context with which you can filter everything that I might cover in this blog. Here goes:

I am a trader, not an analyst and certainly not a blogger (in fact, there is more about blogging I dislike than like)

Amateur analysts and wannabe traders are obsessed with being right. Within 30 seconds of reading material from a blogger or Twerpy Tweeter I know if the person is engaged in the markets to pursue profits or to stroke their self-ego.

I would rather make money on a trade with no knowledge of the market than be an “student of the market” who knows it all but does not have the IRS Schedule Ds to back it up. In my opinion, market expertise is useful only to the degree it puts money onto the bottom line. Market analysis, in my world, is a means to an end and never an end to itself.

[Note: I am not referring in the paragraph above to competent market analysts who are dedicated to the pure pursuit of excellence in their craft. I know and admire a number of analysts and research firms, such as Elliott Wave International, The Bank Credit Analyst, Ned Davis, Jim Grant, etc. My criticism is toward people who pretend to be competent in both trading and analysis, yet cannot back up their big talk with actual results. I have no time for the later, and you know who you are.]

I have no problem changing my mind about a market. I monitor price action (through the charts) and as price action changes, so does my opinion

I may sound like a raging bull one month and a raging bear the next. Does this embarrass me? Not in the least. I have no particular ego need to be right in a market analysis. I try never to be married to an idea. I am a chartist. Chart patterns morph. As a chart pattern morphs I am willing to morph with it.

There are certain mosquitoes in my readership that make a big deal out the fact I stated one thing about a market a month ago and a different thing today. They think they “caught me” when they discover “chronological drift.” People who cares more about “catching me” in a change of opinion than in finding a profitable trade for themselves either have too much time on their hands, too much energy wrapped up in their own egos, or too little money in their actual trading accounts.

In fact, the ability and willingness to modify one’s market opinion has been a hallmark of the best traders I have met in my career.

There is an enormous difference between a market opinion and a market position

An opinion is not a position. I often have a market opinion — some times a very strong market opinion — without having a corresponding position. Why would this be? Quite simply, it comes down to risk management. There are two components to a successful trade — direction and timing.  If one is wrong, the trade is wrong. I may have a strong opinion on a particular market but not be given the chart set up I need to assume a risk position.

By the way, seldom do I carry a position without having a market opinion.

I am obsessed with risk management

Some people are obsessed with being right on a market. Some people are obsessed with pointing out the errors of others. By the way, this just proves that children who constantly “squealed” on their siblings grow up and carry on the same behavior as adults within online virtual communities. I guess we never really get away from the siblings who always need to tell mommy and daddy what we did wrong. Why is it that the photos used on Twitter by these “squealers” make them look stupid? Have you ever noticed this?

By contrast, the focus of my attention is risk-adjusted performance. What good is a 40% annual return if it comes with frequent 60% drawdowns or a 25% annual return if 50% drawdowns are required to get there?

I have literally spent tens and tens of thousands of dollars on developing risk management models. Risk management is what pays the bills, not being anal about some obscure brand of technical analysis, trade signaling methodology or indicator optimization.

If I assume I will make a certain number of trades in the next three years and achieve a certain ending result, I can tell you the odds of X number of consecutive losing trades, losing weeks, losing months, maximum drawdown, asset volatility and the like.

The traders who succeeds at the end of the year are the traders who have the best risk management and ability to overcome their emotions. Period. End of story. Many aspiring traders become obsessed with finding the perfect technical indicators or method to analyze the markets because of their emotional inability to deal with market losses.

I deal in possibilities, not probabilities or certainties.

Anyone who really thinks he knows the outcome of his next trade is fooling himself. Your next trade is just as likely to be a loser as it is to be a winner. A trade is an endeavor dealing with the statistical random distribution of results. A trade is a data point, the next N in a series of Ns, subject to the laws of statistical probabiliity. Nothing more, nothing less.  

I am sold out to a concept I call “strong opinions, weakly held”

Some people think this concept is a sell-out. I could care less what they think. They are free to think whatever they want to think. But when my own money is at risk, I get to think whatever I want to think.

When I see a chart pattern that is clear, I become sold out to the implications of that pattern. I develop a strong opinion and am not afraid to express that opinion. But I hold onto that strong opinion with a soft grip, because the construction of a chart can change. The result is that I believe strongly in an idea until I change my mind. Then I may become strongly opinionated toward a neutral stance or strongly opinionated in the opposite direction.

I want to further unpack this concept of “strong opinions, weakly held” to show you how it plays out in real life trading.

My experience is that 90% of my trading profits come from 10% of my trades (a ratio that is quite common among consistently profitable traders). This happens when I become extraordinarily highly leveraged in a market that makes a big thrust move. The only way I can mentally and emotionally be willing to assume higher than normal risk is by being strongly opinionated on a market. As long as that market behaves kindly to me I remain strongly opinionated.

The graph below displays the distribution of my monthly rates of return since 1981. You will notice that the distribution forms a very normal bell curce with one major exception — the huge outlier on the extreme far right.

 

This outlier represents my profitability — my net bottom line. This outliner is possible for two reasons:

  1. An obsession with risk management may uncover a small number of trading opportunities each year with highly torqued asymmetrical reward to risk profiles
  2. A strong opinion allows me to assume a much more leveraged position than normal in those trading opportunities

“Strong opinions, weakly held” equals heavy leverage with aggressive risk management.

So if the mosquitos want to spend their time commenting on trades that make up the left hand side of my bell curve, let them have their perverted fun?

Finally, I am not shy about expressing my opinion of government in general nor am I too concerned about being politically correct in how I express myself.

So, this pretty well summarizes what my blog is all about. Take it or leave it. And swat a few mosquitos for me along the way.

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Oh, one final thing. I don’t make any money blogging, so I don’t spend much time on it. I make a lot of typos and the English majors among you draw my attention to each one.

 

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How you can get involved to stop insider trading abuses by Congress

 

It is time to get involved to stop this abuse of power.

A note to other bloggers or web sites — feel free to copy/paste and run this post below without giving me credit. My desire is to end this abuse, not generate web traffic for myself. Help put the word out to your readers.

Enough is enough. Congress is out of control. The very idea that members of Congress have abused their power by allowing themselves insider trading activites based on information they receive as part of their job is sickening. It is time to end this abuse. Give your members of Congress a deadline of Christmas to vote up or down on ending this abusive privledge.

Here is what you can do:

1. Call the Chairmen of the Senate Governmental Affairs Committee and House Financial Services Committee. Tell them that you demand an immediate up or down recorded vote by the full Congress on the STOCK Act (Stop Trading on Congressional Knowledge). These Committees are scheduled to vote on STOCK on Wednesday, December 14. [Note: it is always more effective to call members of Congress at their home office because their DC staff is trained to blow you off.] Remember to be polite when you call.

  • Call the House Committee on Financial Services Committee Chairman Spencer Bachus at (202) 225-7502 or at his District office at (205) 969-2296 
  • Call the Senate Governmental Affairs Committee Chairman Joseph Lieberman at (202) 224-2627 or at his State office at (860) 549-8473

2. Call your members of Congress on Monday and Tuesday. Tell them that you demand their support for the STOCK Act. Express your outrage, but do so politely.

To find the names and contact information on your members of Congress, click here. Then,

  • Enter your zip code next
  • Click on the name of your member
  • Click on the contact tab
  • Call his or her home office

Call both of your U.S. Senators and your U.S. House delegate.

Let’s put heat on Washington for their abusive behavior. It is time for Congress to become accountable.

 

This posting is being paid for by Factor Action, a 501(C)(4) entity (pending) dedicated to calling Congress to responsible fiscal behavior.

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New poll: Should Congress immediately ban its own insider trading

Please, please, please, forward this poll to your friends. I would love to have 5,000 people take this poll and send the results to their incompetent (oh, I meant incumbent) members of Congress.

I propose legislation that basically states:

Members of Congress, their immediate family and their staff members are banned from buying or selling shares of stock in any company or industry that:

  • Has contributed money or in-kind donations, directly or indirectly, to the political campaigns of the members in the exisiting term of office
  • Has had any communications  with the members in the preceding 100 days, directly or indirectly, except for communications in formal congressional hearings or public testimony

Members of Congress found to be in violation of this law should be impeached from duty, fined $1 million and serve one year in jail.

[poll id=”9″]

I ask you, the reader, this question — why would you ever vote for someone who could not push for the immediate passage of such legislation?

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Let the trend be your friend!

 

This is an over used concept. So, how do we understand the concept of “trend?”

You all know I am a classical chartist by experience and preference. Classical charting is about geometric configurations. But, trend is much more complex than simple chart patterns.

I want to take a look at the EURUSD to illustrate some concepts of trend. I am picking this trading vehicle on purpose – yesterday I posted a piece predicting a move by the EURUSD to $1.10 based the historical tendency of the January Effect. Looking at an analogue scenario is one thing, actually trading a market is a different matter. Position trading is a function of trend.

I am presenting EURUSD in four different ways to show the different personalities of trend.

The first chart shows the current down trend as a series of lower monthly highs. Until the November high at 1.3860 is penetrated the down trend is intact. However, also notice that November did not take out the October low and December has not yet taken out the November low. This market is range bound on this basis.

 

The second chart shows the downtrend from the October high as a sequence of daily highs that were not subsequently (at least not yet) violated. The last possible high in this sequence was the Dec. 7 high at 1.3453. Trading a market on a “sequencing” basis allows a swing or scalp trader to trade against pivot highs or lows in a trend. If this market really does trade down to $1.10 there will be a number of key high days to trade against. Often a trader who builds a sizable position does so by betting trades against possible highs or lows.

 

The third chart exhibits that most trends are represented by a very few thrusting days – and that all other days represent noise. If at all possible a trader must be positioned for the thrusts. Note in the EURUSD that the entire decline from the October high has been put in by just three days. The market is currently trading “inside” the range of the third day, November 23. At some point, if I am correct in interpreting the stars, additional down thrusting days will occur.

 

The fourth chart shows the trend from the August high in terms of a very simple moving average.

 

Let me make a comment about using a simple moving average as proxy for trend. The net profits for most highly profitable traders come from 10 to 20% of their trades. I call these trades the “net bottom liners.” For me, about 10% or fewer of all my trades over the years have represented my net profitability. Years that are especially profitable had four or five wonderful bottom liners. If I cannot lock into some good bottom liners I will struggle until I do so.

Very few of my net bottom liners were contrary to a simple moving average. On the other hand, the use of the simple moving average as a filter would have eliminated a meaningful portion of my losing trades.

At the present time the simple MA in EURUSD is up. However, a down close on Thursday will flip the MA into a down posture. A move to $1.10 will NOT take place without confirmation from the simple MA.

Use this guidance anyway you want.

Markets: $EURUSD, $6GE_F

 

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