Seeking Alpha

Chris Vermeulen's  Instablog

Chris Vermeulen
Send Message
Chris Vermeulen the founder of AlgoTrades.net Algorithmic Trading Systems. This automated investing system is designed for individual investors and traders. He is also the editor of the TheGoldAndOilGuy newsletter which is designed for gold market traders providing quality ETF Trade Alerts,... More
My company:
AlgoTrades Algorithmic Trading Systems
My blog:
TheGoldAndOilGuy - Gold Market Traders
My book:
Technical Trading Mastery - 7 Steps To Win With Logic
View Chris Vermeulen's Instablogs on:
  • Gold forms Overbought Rising Wedge at Resistance

    Sunday Sept 12
    Precious metals soar as investors flock to gold and silver. But are they looking deep enough to truly understand the current trends at hand?

    When reviewing the metals sector I like to look at it from different angles to get a solid understanding of the patterns and trend forming. I follow multiple time frames along with monitoring the gold mining stocks. Gold stocks tend to lead the price of gold bullion and when its out performing the price of gold substantially by 10% or more you should be expecting a pause or pullback in both gold stocks and gold bullion prices temporarily.

    Below are a few charts showing the long and short term trends for gold.

    Gold Bullion Price – Weekly Trend Chart

    Gold continues to be in a strong up trend. The occasional test of support at the major moving averages can provide great long term points for adding to a position. The 50 period average is one which is tested frequently.

    Looking at the weekly chart does give me a red flag for the intermediate price of gold. While the trend is clearly up I can’t help but notice the rising wedge which is a bearish pattern. During an uptrend we want to see bull flags and pennants, not a grind higher forming a narrowing range. This grind higher could unfold much similar to the price action of 2005 and 2007 instead of a correction but I am leaning more towards a sharp correction because more people are bullish on gold now then they were during the June top.

    For those looking at gold as a long term investment/currency can be patient and wait for a pullback to a major moving average before adding to your position then you would lower your overall risk for this position. You will understand after reviewing the following charts.

    GLD – Gold Bullion ETF – Daily Chart

    (This fund moves identical to spot gold price so even though I am showing you GLD fund, the spot gold chart is doing the exact same thing.) As you can see below the price of gold is trading at resistance and becoming choppy. Buying gold at resistance does not make much sense to me. There is a very good chance gold will move lower in the coming weeks providing a better price for long term investors to add to their positions. For example, if you waited for the weekly chart to pullback to the 50 period moving average that would be like buying this GLD fund at $113, which is an 8% discount.

    Gold continues to hold up within its channel but this week we could see fireworks if the price breaks below the blue support channels.

    Gold:Gold Stocks Comparison – Daily Chart

    This chart shows the performance of gold vs gold stocks from the Feb 2010 lows. The blue line is the performance of gold stocks while the red line shows gold’s performance. It’s obvious that when everyone is bullish on gold they buy the highly leverages gold investments in order to take full advantage of the upcoming move. This is much like reading the put/call ratio for trading the SP500 and it measures the bullishness of the precious metals sector.

    When gold equities are strongly out performing gold bullion you should be thinking about raising your stops, taking partial profits and or hedging your long term position until the sector stabilizes is not trading at a premium.

    Precious Metals Sector Trading Conclusion:

    In short, Gold is in a strong up trend and will remain in one for a long time. Commodities have higher percentage of going parabolic. That means there’s a small chance that gold continues to move up quicker and quicker surging hundreds of dollars in a very short period of time. That being said, it’s not very likely, and from a technical point of view those buying gold now are paying a premium in my opinion.

    Being a patient trader is not easy, but waiting for low risk entry points is very rewarding on many different levels when done correctly.

    Get my detailed ANALISYS and TRADES for Oil, US dollar, Treasury notes, the broad market, and Sectors. Be sure to join my ETF Trading Service at: http://www.thegoldandoilguy.com/specialoffer/signup.html

    Chris Vermeulen



    Disclosure: I currently do not own gold or gld
    Tags: GOLD, GLD, gold, etfs
    Sep 12 11:16 PM | Link | Comment!
  • High Volume Resistance Plagues Precious Metals, Oil & SP500

    Sunday Aug 29th, 2010
    Last week was a relatively strong week for stocks and commodities. Although the SP500 closed slightly lower on the week the price action Friday was strong. The recent pop in commodities has everyone feeling good and bullish again and we all know how the market works… When everyone is feeling good the market has a way of shaking things up.

    Below are a few charts showing heavy volume resistance levels that will most likely cause the broad market & commodities to pullback or trade sideways for a few days as buyers and sellers play tug-o-war.

    SLV – Silver Bullion ETF Trading

    Silver had a very nice pop last week but if you step back and look the recent price action you can see that it’s still trading below the previous major bounce from back in June. It looks as though silver is a little over extended as large percentage moves tend to give back 25-50% of the mover shortly after.

    Take a look at the price by volume bar. It shows there has been heavy volume traded at that $19.00 level and the previous time it was reached sellers stepped back in pulling silver down.

    GLD – Gold Bullion ETF Trading

    Gold is trading deep into the resistance level and struggling to hold up. Last week we went long GLD after the bullish engulfing candle and took profits near the high two days later on Thursday’s price. Although gold is trading at resistance the intraday price action remains somewhat bullish/neutral for the time being.

    USO – Oil ETF Trading

    The oil ETF broke down from its large multi-month bear flag and is now bouncing up to test that breakdown/resistance level. This could be a possible kiss good bye. I will keep my eye on this commodity as it could provide us with a great shorting opportunity in the coming days.

    SPY – SP500 ETF Trading

    The equities market has been tried to bottom all week and Friday’s price action looks strong. While the chart looks strong the market internals are telling me the opposite. Last week we saw a gap down and Friday that gap window was filled. With heavy volume resistance just above the current price the odds are pointing to lower prices.

    Weekend Equities and Commodities ETF Trading Report:

    In short, it looks as though everything is trading just under or at resistance levels. That means sellers will start to enter the market and cause prices to stall (trade sideways/choppy) and or reverse lower.

    That being said, with Friday’s strong close for oil and the sp500 I am expecting a gap higher in the morning because traders will review those charts this weekend and enter the market Monday feeling bullish.

    If you would like to get my ETF Trade Alerts for Low Risk Setups checkout my service at: www.TheGoldAndOilGuy.com/specialoffer/signup.html

    Chris Vermeulen



    Disclosure: i am currently long Gold
    Tags: SLV, GLD, USO, SPY
    Aug 29 10:49 PM | Link | Comment!
  • The Stealth Greek Of Options Trading: Vega

    By: Chris Vermeulen & J.W. Jones

    In my previous missives on the Greeks of the option world, we have spent most of our time focusing on Theta and Delta. In the real world of option trading, option prices are the subjects of three primal forces: price of the underlying, time to expiration, and implied volatility.  Delta and theta address the first of these two primal forces. The third primal force, implied volatility, is by far the least known by newcomers to the option trading world. However, while it is usually not respected or even known by many new to trading options, it typically is the most frequently unrecognized force resulting in is the cause for significant trading capital deterioration.

    In order to set the framework within which to understand option pricing, it is essential to understand that the quoted price of each option is in reality the sum of the intrinsic value (if any) and the extrinsic (time) value.  The intrinsic value has been discussed previously and consists of the portion of the premium which reflects the extent to which the particular option is “in the money.”

    Understanding of the various concepts of volatility is essential to grasping one of the essential defining operational characteristics of the world of options.  Volatility can be considered in light of:

    1. What was (SV, statistical volatility; HV historical volatility; & other synonyms of the same)

    2. What is,

    3. What shall be (IV, implied volatility, and Market Implied Volatility (MIV) They are all confusingly disparate words and acronyms signifying identical concepts)

    Of these three time frames within which volatility can be considered, implied volatility is by far the most important. The nexus point is right here, right now, while the future is unclear and will always be that way. For an option trader to sustain profitability over long periods of time, it is essential to understand implied volatility and its various implications.

    Let us consider for a moment the variables defining an option’s price.  Intrinsic value is a crisply defined value that requires simply the calculation of the relationship of the price of the underlying to the strike price of the option and can theoretically vary from 0 to infinity. The time value (also termed the extrinsic value) of the option is dependent, in large part, on two distinct variables. These variables are the amount of time to expiration and implied volatility. Time to expiration is easily defined by anyone with access to a calendar and schedule of option expiration dates. Option expiration is easily accessible for option traders, and as such represents a totally transparent variable. Conversely, implied volatility is not as easy to explain, or quantify.

    The subjective concept expressed by implied volatility is to be distinguished from the mathematically objective and precise concept of historic volatility.  Historical volatility is simply derived from the price action of the underlying and can be calculated in one or more of several iterations. Each calculation is fundamentally derived from historically apparent price action.

    Implied volatility is not only arduous to understand, it is even more difficult to quantify. A totally different calculation is required; the computation is reflective of a unique and characteristic point of view with regard to price action. It is technically calculated by an iterative process requiring multiple trial and error calculations; thankfully the robust computational ability of the current generation of computers handles this task easily.  Of the three primal forces impacting option price, implied volatility is the only factor subject to cerebration. As an adaptable and subjective input factor, implied volatility is reflective of both general market sentiment and the subjective evaluation of potential future volatility while simultaneously corresponding with the specific direction of the underlying. As such, it is a forward looking evaluation as opposed to historic volatility which is well, historic.

    Implied volatility has a historic and characteristic range for each underlying.  A strong historic tendency is the characteristic for implied volatility to revert to the mean for the particular underlying under consideration.  This strong mean reverting tendency forms one of the primary fundamental tenets of option trading and represents a major opportunity for potential profit in option trading.

    TheOptionsGuide site produced the chart below that illustrates the behavior of Vega at various strike prices that are expiring in 3 months, 6 months and 9 months when the stock is currently trading at $50.

    In addition to the historic backdrop  in which implied volatility may be considered, there are certain stereotypic patterns of IV expansion and contraction in relation to anticipated events which may lead to unusual volatility of the underlying. Classic examples of these events include earnings, impending FDA announcements, and the release of key economic data by the government or the analyst community. For example, many of the most extreme increases in implied volatility anticipate FDA decisions and routinely revert to the mean immediately following the anticipated announcement. Potentially substantial profit opportunities are borne from such situations for the adept and knowledgeable option trader.

    In future writings we will address the precise mechanisms by which perturbations in implied volatility can be exploited for profit by the knowledgeable option trader. Failure to consider the current position of implied volatility in a historic framework for the particular underlying in which you are contemplating a trade is the single most frequent hallmark of an inexperienced trader. Lack of attention to this important factor in trade planning is the most frequent cause of paradoxical option behavior and failure to profit from correctly predicting anticipated price movements of the underlying.

    While most equity traders focus their attention on the SP-500 for broad market clues, option traders always have a watchful eye on the volatility index, commonly known as the VIX. While the VIX is the most common volatility measurement in the option trading world, there are several volatility indices which can be monitored, followed, and even traded if one is so inclined. While it is not always necessarily the case, recently when the VIX rises, the broad markets are selling off.

    While this article has been a basic overview of implied volatility and Vega, it will conclude the series of recent articles which have been focused on the option Greeks. Forthcoming articles are going to be more focused on trades and the unbelievable profit opportunities that can be created by various option strategies. In closing, if you are interested in furthering your education regarding options my recommendation is to do some serious homework. Otherwise it will only be a matter of time before a combination of Theta, Delta, Vega, or implied volatility rear their ugly heads and take money from unsuspecting rookies.

    If you would like to receive our free options trading reports and trading signals please join our free newsletter at: www.OptionsTradingSignals.com

    J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized.



    Disclosure: Currently do not hold any positions
    Tags: options
    Aug 26 4:50 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.