The past three weeks have been interesting to watch as the Dow ETF (NYSE: DIA, Stock Forum)has broadened, and shaken traders in and out of their positions. Commodities have been under pressure as the US dollar has risen. Below are some charts of these investments, and my forecasts for the next couple of weeks.
DIA – exchange traded fund
As you can see from the chart below, the broadening formation is bearish, as it results in a short term pullback. This type of price action is what frustrates breakout and novice traders. As traders jump into positions once the previous high is broken, they hope for a rally. Instead the market briefly moves higher then reverses and moves down to penetrate the previous pivot low. This is where breakout traders place their stops and, as the market knows this, it obliges by moving below this level to shake out these traders before it rallies again.
That being said, it looks like stocks could make a new high this week, just enough to suck in more short-term breakout traders before rolling over once again to test a deeper support level. A pullback to the $99-100 level would make for a great buy point.
GLD – Gold exchange traded fund
The strengthening dollar is putting pressure on precious metals with gold testing the first support level. Depending on what the dollar does in the coming days we could see gold test the second support level.
In my opinion, gold (NYSE: GLD, Stock Forum) can test the second support level without triggering any major sell signals for traders and investors. The trend will still be up and it is important to know the horizontal support level is more important than a trend line support level.
SLV – exchange traded fund
Silver (NYSE: SLV, Stock Forum) is in the same boat at gold. In the short term, it’s unclear whether the ETF will bounce or further test lower. In either case, the underlying trend is up, and we will be able trade it.
USO – oil exchange traded fund
Oil (NYSE: USO, Stock Forum) broke down out of its bull flag last week, and is currently testing both trend line support and horizontal support levels. We could see a short term bounce here to the 37, 38, or 40 levels. Taking money off the table at each resistance level and raising your stop is an important money management strategy I use for this type of play.
This is a high risk type of play, which I am not taking part in. But I do find it fun to track plays like this for educational reasons.
UNG - natural gas exchange traded fund
The natural gas fund (NYSE: UNG, Stock Forum) is a touchy topic with so many traders. I get emails every day asking why I trade UNG, because of the contango [a term used in the futures market to describe an upward sloping forward curve – ed.], and the fact that so many people have lost money with it; many traders don’t want to touch it again. My answer is very simple; it works perfectly fine for short term trading which lasts 1-20 days. “If it works, Don’t Fix It.”
I do agree UNG is tougher than other ETFs to trade, but it still makes money and that is our goal.
Natural gas has found some support and is bouncing around. We could see it trend sideways or up until a test of our blue resistance trend line is reached. From there we can assess the situation for a possible trade.
The underlying trend is down on the monthly and weekly charts, so do not get too excited about going long anytime soon.
ETF trading conclusion:
Overall the market feels a little top heavy, and the price action on the charts confirms this statement. My short-term indicators are telling me the Dow (DIA fund) is overbought and ready for a couple days of selling. With any luck we will see a test of support, which will flush out many short-term traders this week, then a nice low volume rally going into Christmas. On the other hand, the market has been holding up well and prices could continue to drift higher from here. If that is the case we will simply continue to hold our current long positions and enjoy the ride.
Silver and gold are testing support levels and if the market continues to rally here, I figure precious metals will follow. But if we see stocks pull back and test support, then we will most likely see the metals pull back further also.
Crude oil has formed a scary looking chart as it flushes out traders on this recent drop. My general rule for spec plays is to buy when the chart looks scary but is trading at multiple support levels. It is very difficult to buy at these levels, but as my good buddy David Banister from ActiveTradingPartners.com always says, “Buy when they cry, sell when it’s loud,” meaning buy when everyone is panicking out of their positions, and sell when everyone is buying into the move -- usually seen by high volume levels and much higher prices.
Natural gas is jumping around like crazy. We continue to wait for a tradable price pattern to form in conjunction with a support or resistance level to help put the odds more on our side.
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Chris Vermeulen
Disclaimer: I currently own GLD exchange traded fund.