Here is the latest on GOLD

It has formed the infamous triangle on a weekly chart. High level triangles the technicians will tell us are generally a bearish formation, and breaks below the downside of them should be shorted.

At the same time the commercials have been moving to the long side and open interest has been dropping. What this tells us that a larger and larger % of the positions on the long side are commercials.
This is bullish, yet we have a bearish chart pattern.

What to do? At this point I do not see a high probability entry into this market, so for me I will just stand aside and let the economists tell us what will happen here.

Profitable Trade

Here is the exit this am in the S&P trade I mentioned in the previous post. The market felt weak this am early so I exited just before the open for 5 point profit/$1250 per contract. This was not a great trade but still was a profit.

This market looks a little heavy to me here, so I am expecting a drop to begin any day now. However, this trade was with the trend so the odds are always in your favor when you are in sync with the larger time frame trend.

S&P 500 Update

Here is an update on the SP 500 chart I posted the other day. You can see the small b indicating a buy spot in one of my trading systems. I have been long this market the last 3 days. It is in an uptrend and we have had a small breakout of a flag pattern in the direction of the trend.

The Bond market below is supporting the upmove in stocks by being in an uptrend also. I will be exiting this trade tommorrow in all likelihood depending on the opening. If it is a profitable open, it will be exited.

There are a few storm clouds on the horizon potentially which will be covered in my newsletter coming out at the end of the week. There are some divergences setting up that could signal this upmove in stocks is about to end, but for now the trend is up.

HOUSING STOCKS

I have been asked quite a bit recently about shorting housing stocks and lenders. Many people know of my forecast about a year ago for a drop in the housing market. If I am so bearish on housing, am I short the housing stocks?

The answer is no, and the chart to the left of TOLL Brothers shows why. I have learned over the years that there is an upward bias in general to the stock market, so taking short positions really requires a "loaded deck." Loading the deck in stocks for me requires, trading in sync with the trend, and having valuations that match that trend.

In uptrends I want low debt and low valuations and good earnings, and in downtrends I want high debt, high valuations, and declining earnings. As you can see from the chart to the left we do have a downtrend in price. However, as we review the other 3 categories we see that we have rising earnings, low debt, and low valuations. These are the opposite of what I am looking for to short stocks in a downtrend.

As a result of this there are no short trades. It is really as simple as that. I do not inject my opinion into my model because opinions can be so arbitrary and hence unreliable. I do believe housing is in for some trouble here, but I do not ignore my model EVER! I may miss some opportunities, but I focus on the ones I do pursue, not the ones that got away. There is always another trade, but there is not always more money for the next trade if you have chased too many marginal opportunities.

SP 500

Here is a chart of the S&P 500 Futures. We have a bull flag formed as indicated by the red line. We have had a nice rally off the lows that has broken the downtrend, and now we have formed a small consolidation flag.

This move up has also been supported by dropping interest rates ( higher bond prices ) charted below. Notice how the bond market started it's rally while the stocks were making their final drop down. This type of divergence often happens at market lows.

I have been looking for a drop into the fall to set up the mid term congressional election buy spot, but we may not get that. Seasonals say that we will, but this setup right here is fairly bullish for the very near term. I did not expect to see a rally like this at this time, so I have been wrong about this so far. A breakout above this flag is a legitmate long side entry in the market.

SP 500

Here is a chart of the S&P 500 Futures. We have a bull flag formed as indicated by the red line. We have had a nice rally off the lows that has broken the downtrend, and now we have formed a small consolidation flag.

This move up has also been supported by dropping interest rates ( higher bond prices ) charted below. Notice how the bond market started it's rally while the stocks were making their final drop down. This type of divergence often happens at market lows.

I have been looking for a drop into the fall to set up the mid term congressional election buy spot, but we may not get that. Seasonals say that we will, but this setup right here is fairly bullish for the very near term. I did not expect to see a rally like this at this time, so I have been wrong about this so far. A breakout above this flag is a legitmate long side entry in the market.

Housing Futures

Here we have an update chart on the LA region housing futures. I hesitate to even call this a chart, it is just a bunch of dots on a page. The reason it looks like this is the complete lack of volume.

There are not even enough trades during the day to create daily ranges. This is a shame, as it undermines the usefulness of this product. As I have stated before, until the housing insiders become players in this market, it will not even be viable as a hedge play for individuals.

You could take a position, and be correct, yet not be able to get out of the trade with a profit due to the lack of liquidity. Now is a great time to be short housing just based on what appears to be a large scale dropoff that is beginning to unfold. However, you can not play it here with any degree of certainty due to low volume. I think the large scale players(builders) are hesitant to take a public short position for everyone to see for fear of undermining consumer confidence in this sector. That is just an opinion which may or may not be accurate. I do not know of another way for these companies to hedge their land cost positions which is currently cutting into their margins.

Here we are waiting for Mr. Goodbar

We are short the bonds here and awaiting that nice down bar. The trade is going against us a little at this point but we are about at the average draw down for this particular pattern.

Notice how we continue to have the indicator that measures professional activity within the day lagging the price move upward. I have displayed many of these in the past and it is typical for them to last for a bit. There is no magic to things like this dictating the minute it appears, price will crumble.

We are in a period of seasonal strength in this market, so we cannot be surprised that it is carrying on a bit. However, in general, when we see this type of setup a correction normally ensues. Once again, I display this as a tool. This trade entry does not have this as part of the rules for the entry. Divergences often show up against the direction of the main trend like this, so we need to be careful not to get too carried away with how we use them.

It should be noted, that a trading methodology could be constructed with this tool at the core of it, but it is a tool not the grail. In general divergences should be used to take profits in trends, not to fight the momentum of them.

Blogger seems to be cooperating now. Here is a chart of the US DOllAR

Notice how the seasonal trend is heavily down from here on out. Also, we are in a downtrend, with a rally against the trend. The commercials are in middle ground, but are heading toward the short side of this market.

If we can get a small rally, or even sideways move, with the commercials shifting to the short side during that period, we will have a nice short sale setup.

Once that happens, just look for short term pattern entries on the short side to enter the trade.

BONDS

Here we see the 30 yr bond chart. We have had a nice rally off the lows and have broken the strong downtrend on the daily charts. Monthly charts still show a downtrend in place.

Notice how we have the ProGo indicator showing a divergence against this upmove. We have 3 higher highs in price with 3 lower peaks in the indicator. These 3 point divergences speak loudly that the insiders are not buying heavily into this upmove. The COT report comes out today, so we will see if the commercials are moving out of this market. As of last week they were reducing long positions.

The daily trading service does have a sell signal for today that has not been filled yet as I write this. It is NOT based on this graph. The daily service is a completely mechanical system and this type of visual is not programmable. However, I do like to see this type of thing backing a mechanical signal to take action. It combines a little art with alot of science.

CRUDE OIL

I am posting this Wednesday after the close. Crude Oil has come down a bit here in recent weeks, so let's look at the dynamics of this market.

First notice how the commercials have been steadily moving to the short side since the beginning of July and are now heavily short. Also at the same time look at open interest rising during this same period. What this tells us is that a rising percentage of positions were by the non-commercial players which is always a bearish sign.

Also notice how bullish the sentiment index is, yet another bearish sign. So at the beginning of July we have rising open interest, declining commercial longs, and bullish sentiment. These are what tops in price are made of. Does this mean we will have a huge fall, no. What it meant at the recent highs was that this was a selling opportunity until the above fundamentals change.

S&P follow up

It was good that I followed my rules (I always do) on this setup. We had a strong up day today, and that short trade I mentioned earlier would be underwater so far. This is why it is so important to have your trading rules line up as many things as you can supporting your decisions. That approach will keep you out of trouble for the most part. Trouble will find you in futures anyway, so why not avoid it when you can.

The chart I have here shows what I consider to be a bearish setup in the works. Notice the negative divergence between the ProGo indicator at the bottom and price. Insider buying is lagging this push up we are having. The bond market is supporting it, which is a positive. The commercials are currently in middle ground.

We have a seasonal tendency for a decline, so when we combine this with this lack of insider buying intraday, this sets us up for a fall. Ideally, what would happen is that we take out the high of 7 days ago, with the ProGo lagging this move. This would setup a short sale opportunity. What we currently have is a developing situation that needs to be watched. My system does not have any sell signals yet, but I am studying this closely to see if there is a pattern at hand to act upon. Nothing yet, but if I find one I will post the trade here.

S&P 500

I wanted to short this opening so bad I almost had the tie my hands behind my back to stop myself. A gap open above a day like yesterday just "looked" like a shorting opportunity to me.

However, although my pattern book does show a downward bias from several different angles, I could not dial this in tight enough to meet my criteria for trading it.

We can just watch it and review tommorrow what transpired. I will also continue to research this to see if there was something that I missed which would have given the green light for this trade.

I think it is of the utmost importance to have discipline in determining when and when not to trade. I may miss alot of trades, but all I am concerned with is what happens in the ones I do select. I have displayed the TICK and TRIN with this just for a different look than most of the other charts I post here.

STAYING WITH GOLD

As we keep following the story in gold the value of waiting for the breakout above the consolidation for entry has proven it's worth. The price never rallied enough to trigger a long position in this market (the area marked buy above), and look at the selloff we avoided.

It is generally not advisable to trade the downside breakouts of these formations unless it is with the overall trend. In this case it would have worked for a nice profit, but it is clearly against the trend in the market.

Just look through old charts and mark off these tight consolidation periods, and then note the breakouts which we call continuation patterns, in the direction of the overall trend. It is a very basic way of trading with the trend in the financial markets. This can be done with stocks as well.

T BONDS

The bearish divergence that I pointed out in T Bonds last week has finally resulted in a price drop.

I mentioned that these can go on for awhile before anything happens and that is exactly what occurred. This is case in point about why you should not just blindly fade a market move just based on an "indicator" reading. This may not seem like it took that long in days, but if someone is trading a 60 minute chart, this is an eternity. The divergence first showed up at the end of last month.

To sit in a trade for two weeks that is based on a 60 minute chart pattern would rank as a poor trade in terms of timing. The whole point of using a 60 minute chart is to dial in the timing of a higher time frame setup

Thankfully, Paul McCulley from PIMCO said don't short bonds right at the high. So I shorted them. ( Just a wise crack - I did not short term due to his comments ) As a result the shorts did pay off from up there. Of course, his comments were based on a higher time frame than this. I doubt he cares about a one basis point move.

However, as a short term traders, that is $1000/contract or the equivalent of a $10 move in Gold. This is more than enough movement for us to profit from.

GOLD

The consolidation/flag pattern in Gold continues. Today is a good example of why "front running" the breakout as I mentioned yesterday, is not a good idea. Waiting for a clear breakout of these types of patterns is important.

I would recommend waiting either for a close outside of the pattern, or at the very least a break above the high of 4 days ago, not including todays bar. That would mean the 2nd bars high that the red line connects to.

Discretion is required when playing these types of formations. This is why I do not trade like this. However, you have the fundamentals at your back so a breakout of this pattern, with the underlying trend and seasonal tendency, has a reasonable expectation for a profitable trade.

Historically the 7th trading day of the month ( yesterday ) and the 12th trading day of the month, have been the 2 best days in August to buy for a short term move. Yesterday, the 7th was profitable buying the open and exiting this am. It remains to be seen if the 12th will be. It would be a nice combination if a breakout were to occur on that 12th(bullish day) trading day of the month.

Rarely do things work out that perfectly in futures, but it is something to be aware of.

Our gold pattern continues to tighten up. Now we definitely have the tightening range type of breakout pattern we want to look for on a long side entry in this market. The seasonal tendency favors an upmove as well here.

I have bracketed the pattern for those who are not familiar with the flag terminology to see that it resembles a flag when presented like this.

This is a very basic continuation pattern that traders have used for years.

GOLD

Here we revisit the Gold market. I had discussed in the past trading little flag patterns with the trend. This is a smaller, tighter type of flag setup offering a better entry point.

This is just part of the general education I offer in this blog. If you are inclined to be a player on the long side of this market, a breakout in the direction of the longer term trend which is up, is usually a fairly low risk trade.

I want to also repeat what I have said previously, which is that I do not trade these types of patterns. In the old days I used to trade these almost exclusively. They do provide an overall edge in trading. We are at the time of the year that seasonally has an up bias in this market.

This is a short term pattern, if you are a long term player you should already have been long at 608 at the very worst.

T BOND FOLLOW UP

Here is a prime example of what I spoke about the other day regarding indicator divergences. I have mentioned the negative divergence that had developed in bonds between insider buying and the price. I had also said that these can carry on for awhile, and were not a trigger by themselves.

Notice how the bond market has continued to rally in spite of this divergence. I have seen this happen many times during trend runs like this. Make no mistake, on a "short term basis," this market has a strong uptrend going. All these types of things are is tools to give you a general direction of what to look for next.

It it tough to go with markets, against the direction of the divergence. At times this is exactly what one must do. I do have a short position on that is based on a bar pattern. It needs to be stated, that it was not put on because of this divergence. It was based on entirely different parameters. These divergences are not programmable, they are just things you can see and observe.

Housing Futures

Perhaps the only thing that is a bigger bust this year than housing itlself, is the housing futures launch. This is a textbook example of what we would call an illiquid market.

If you just take a cursory glance at all of the other charts I post in here, you will immediately notice a big difference. This chart is just a bunch of dots. Also, looking at the volume at the bottom, there is not much if any trading going on at all in this market.

I had stated openly, that I feared this would not be the vehicle everyone hoped for prior to it being launched. There were a couple of reasons why I felt this way. First, to fully hedge the amount of equity many homeowners have, someone would have to take a very large position. Since everyone would be looking to take the same side of the trade, liquidity on any exits would be unlikely. As a result, you could be right about a drop in price, but by the time you got out, you could actually lose money.

Someone has to be on the other side of the trade for this liquidity to be there. The second reason was that I thought the homebuilders would be hesitant for PR reasons to hedge in this market. They are the ones who could place enough money in this market to create liquidity. However, can you imagine what would happen if a story came out that said a large builder had just recently taken a big short position in housing futures?

Time will tell if this market has a future. Maybe as the price drop picks up some steam, volume will pick up. However, I would suggest that it will not. The big players (builders) already know what is in the process of happening, and they are still not putting any money here. It would be contra to the nature of insiders to chase something down. The hedging they generally do is on the front side.

Participation by the "big money" is always needed to provide proper liquidity for trading. Until this market picks up some of that, it is not worth looking at.

GOLD

As a follow up to the post from a few days back about GOLD, here is how we look at present. The breakout from the flag has actually been successful. I had commented about how those types of flag setups, with steep wide range bars were low probability, and that I expected this to fail. I was wrong about that, but not wrong about the probabilities. These types of patterns, even though this one worked, are not high probability trades. I am not going to catch every move. I just want to catch the ones correctly that I choose to trade. This is done by trading only the highest probability setups, and having the discipline to stand aside during these types of periods.

Trading can be very exciting, but there is no need for there to be excitement caused by foolishly losing money.

Notice how the commercials below are exiting this market on this rally, and that open interest has declined significantly. The open interest decline only is significant in that it is declining due to commercials exiting. If it were declining due to non-commercials exiting, it would not be a negative.

I would expect a sell spot to potentially develop if this trend continues.

This is a Cotton Chart. This is beginning to look interesting. Notice how we are approaching the typical seasonal low. The commercials have been increasing their long positions in general on this dip the last few months.

The Red Line is just a basic trendline, nothing fancy there. This market is in a pronounced downtrend, so we do not want to get too carried away with catching the knife on dips. We need to watch this to see if the commercials increase their longs on a break to new lows in the next few weeks.

If this were to occur, then one good place to buy would be on any break above the downtrend line. We could buy weakness on that condition also, if we got some type of divergence. The Pro Go at the bottom is diverging somewhat at this point. If price were to make a lower low, with Pro Go not following, that is another possible setup. We will follow this here to see what unfolds.