Chris Vermeulen's  Instablog

Since the middle of April everyone and including their grandmother seems to have been building a short position in the equities market and we know picking tops or bottoms fighting the major underlying trend is risky business but most individuals cannot resist.

The rush one gets trying to pick a major top or bottom is flat out exciting and that is what makes it so darn addicting and irresistible. If you have ever nailed a market top or bottom then you know just how much money can be made. That one big win naturally draws you back to keep doing it much like how a casino works. The chemicals released in the brain during these extremely exciting times are strong enough that even the most focused traders fall victim to breaking rules and trying these type of bets/trades.

So if are going to try to pick a top you better be sure the charts and odds are leaning in your favor as much as possible before starting to build a position.

Below are a few charts with my analysis and thoughts overlaid showing you some of the things I look at when thinking about a counter trend trade like picking a top within a bull market.

The SPY, DIA, IWM, QQQand XLU performance chart below clearly shows how the majority of traders move out of the slow moving defensive stocks (utilities - XLU) and starts to put their money into more risky stocks. This helps boost the broad market. I see the same thing in bonds and gold this month which is a sign that a market top is nearing.

That being said when a market tops it is generally a process which takes time. Most traders think tops area one day event but most of the times it takes weeks to unfold as the upward momentum slows and the big smart money players slowly hand off their long positions to the greedy emotion drove traders.

Look at the chart below and notice the first red box during September and October. As you can see it took nearly 6 weeks for that top to form before actually falling off. That same thing could easily happen again this time, though I do feel it will be more violent this time around.

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Using simple trend line analysis we see the equities market is trading at resistance and sideways or lower prices are more likely in the next week or two.

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This chart because it's based on a very long term moving average (150sma) is a slow mover and does not work well for timing traded. But with that said it does clearly warn you when stocks are getting a little overpriced and sellers could start at any time.

General rule is not to invest money on the long side when this chart is above the 75% level. Rather wait for a pullback below it.

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This chart is based on the 20 day moving average which moves quickly. Because it reacts quicker to recent price action it can be a great help in timing an entry point for a market top or bottom. It does not pin point the day/top it does give you a one or two week window of when price should start to correct.

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As we all know or will soon find out, trading is one of the toughest businesses or and one of the most expensive hobbies that one will try to master. Hence the 95-99% failure rate of individuals who try to understand how the market functions, position management, how to control their own emotions and to create/follow a winning strategy.

With over 8000 public traded stocks, exchange traded funds, options, bonds, commodities, futures, forex, currencies etc… to pick from its easy to get overwhelmed and just start doing more or less random trades without a proven, documented rule based strategy. This type of trading results in frustration, loss of money and the eventual closure of a trading account. During this process most individuals will also lose friends, family and in many cased self-confidence.

So the next time you think about betting against the trend to pick a top or a bottom you better make darn sure you have waited well beyond the first day you feel like the market is topping out. Stocks trading over the 150 and 20 day moving averages should be in the upper reversal zones and money should be flowing out of bonds and other safe haven/defensive stocks to fuel the last rally/surge higher in the broad market.

Also I would like to note that I do follow the index futures and volume very closely on both the intraday and daily charts. This is where the big money does a lot of trading. Knowing when futures contracts are being sold or bought with heavy volume is very important data in helping time tops and bottoms more accurately. And the more experience you have in trading also plays a large part in your success in trading tops and bottoms.

Download my FREE eBook on Controlling Your Trades, Money & Emotions: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

Many investors and traders make the same mistakes assuming that one needs a complex trading system to consistently profit from the stock market. On the contrary, some of the top performing strategies are the ones with the least amount of moving parts and are simple. Because their simplicity they can be easily and consistently followed.

The methodologies we use for timing the market, picking stocks and option trades are very simple because we focus mainly on price, volume and momentum. These three indicators are the key to success. When these are used together you are able time your entries and exits during key turning points, clearly define risk and reward levels while maintaining a clear unbiased state of mind which allows one to trade almost emotionless.

As my Trading System Mastery coach (Brian McAboy) taught me, if you do not have a detailed trading plan which a five year old could trade, then you do not have a solid strategy and will have unnecessary losses and emotional stress.

So here are a couple tips to keep things simple and emotionless:

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Our recent trade in Infoblox Inc. (BLOX):
This stock was flashing several signals (price, volume and momentum) that a bounce or rally was likely going to happen within a few weeks. This is a good example of a swing trade based purely on our main indicators.

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Our Broad Market Outlook:

Current stock market prices (SPY, DIA, IWM, QQQ) are starting to warn us that a market correction is near. You can read more about this in detail in our last report "Stocks Preparing for a Pullback, Buy Bas News, Sell the Good".

We all know the market works with the saying:
"If the market doesn't shake you out, it will wait you out".

How does this work? Simple really, during down trends and just before a market bottom we tend to see capitulation spikes in selling. These scare the last of the long positions out of the market and suck in the greedy shorts after the move has already been made.

During an uptrend which is what we are in now the market makes spike highs designed to scare out the shorts and get greedy long traders to buy more. Once again after the move has already been made and likely near the market top.

If you are the type of trader who always tries to pick tops and bottoms against the current trend then you may like to know this little tip… The largest percent moves typically happen during the last 75% of the trend. What does this mean? It means when you take your position against the trend trying to pick the dead top or bottom you are most likely going to get be caught on the wrong side of the market in a big way.

Most traders I know based on recent emails have been short the market for 1-3 weeks and many keep emailing me that they are adding more shorts each day because they feel the market is going to top. So me being a contrarian by nature in terms of what the masses are doing, if everyone is still holding on to their shorts we likely have not seen the top just yet. Another 1-2% jump from here should be enough to shake them out though…

If you like this article join my free newsletter to receive more timely trading insight at: www.TheGoldAndOilGuy.com

Chris Vermeulen

How to trade Gold and other precious metals related investments is not that complex. But you must be willing to wait for price to provide low risk entry points before getting involved. Precious metals are like any other investment in respect to trading and investing in them. There are times when you should be long, times to be in cash and times to be short (benefit from falling prices).

Since 2011 when gold and silver started another major bull market correction the best position has been to move to cash or sell/write options against your positions to protect your investment until the next trend resumes.

If you take a look at the chart below of gold you will notice that in 2008 we had a similar breakdown in price which purged the market of investors who where long gold. And if you compare the last two breakdowns they look very much the same. If price holds true then much higher prices are likely to unfold at the end of 2013.

The key here is for the price to move and hold above the major resistance line. If it can do that then we are looking at a possible breakout to $2600 - $3500 gold. With that being said gold and silver may just be starting a bear market. Depending what the price of gold does when my resistance level is touched, my outlook may change from bullish to bearish.

Also with last weeks economic numbers getting better in the USA I do have concerns that gold may be starting a bear market but we will not know for several more months yet.

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Major technical damage has been done to the chart of gold. This can be seen as bullish or bearish price action but until price and volume pattern unfolds which puts the odds on the bullish or bearish side I remain neutral. GLD DZZ GLL

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Silver is in the same position as gold. The question is if this is a shakeout or breakdown… SLV SIVR AGQ

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Gold mining stocks broke down a couple months ago and continue to sell off. If precious metals continue to move lower then mining stocks will continue their journey down. The chart below made in February and it has in most part played out as expected. While I do not try to pick bottoms (catch falling knives) I do like to watch for them so I am prepared for a new position when the time and chart become bullish. GDX GDXJ SIL

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In short, precious metals continue to be in a down trend. While they look to be trying to bottom it is important to remember that the largest moves take place in the last 10% of a trend. So we may be close to a bottom but there could be sharply lower prices yet.

The time will come when another major buy or short signal forms and when it does we will be getting involved. The exciting part is that it could be just around the corner. If you want to keep current and take advantage of the next major move be sure to join me free newsletter here: http://www.GoldAndOilGuy.com/

Chris Vermeulen