We published a report on Seeking Alpha on June 27, "Gold Bulls Caught in a Trap." It garnered many responses because all the gold bulls came out of the closet. After reading some of the comments, I was struck by the number of comments chastising me for having written that report. There appears to be some understandable confusion about our work and about reversion to the mean. It is a universal principle. What is unique about our work is that we took that principle and implemented metrics, such as Wave patterns, Fibonacci numbers, and Gann principles, to create our algorithm, the Variable Changing Price Momentum Indicator (VC PMI). Our algorithm took years to develop and hundreds of thousands of dollars. Now, for the past few years, we have been able to automate the program and it has shown some truly above-average returns.
The VC PMI gave us the signal that the market was expecting a correction into the levels in the $1379-1380 area. The report said, "The fact that the market came down below the sell 1 (S1) level and activated the buy 1 (B1) level of $1379, means that there is a 90% probability that the price will come back down and test $1379," which was the weekly average identified by the VC PMI.
Since the July 1 report, the low was $1384.70 on Monday. We issued a special alert in our Elite Trading Room for our subscribers on Sunday night to cover their short positions and wait for the signal to go long, which would be after the market tested the $1379 level and came back up, or for the low of $1384.70 to come back up again. If it closed above $1396, the report very clearly stated that it would activate a bull trigger or a buy signal.
In our July 2 Seeking Alpha report, we said, "We are waiting for the artificial intelligence to tell us when to enter into a long position after covering our short positions over the weekend. If the market closes above $1397 it would activate a major buy trigger point. If the market closes below $1389, which is the monthly average price, it would activate the extreme levels below the mean." $1389 is one of the protective stop levels we use for our traders.
The VC PMI can provide a clear and precise structure for trading physicals, ETFs, stocks, securities or for any market. It provides the reversion to the mean probability structure within a daily, weekly or monthly framework. Nothing is guaranteed, but the VC PMI is based on the science and mathematics of reversion to the mean and other principles. It has achieved 90-95% probability in predicting reversions to the mean. The VC PMI does not include any kind of chatter, such as you find from many fundamental analysts. It gives you the mathematical probability structure within a specific model to know the probable direction of a given market.
The targets after being activated at $1397, in the weekly report, were into the $1437-1461 area, which are the weekly targets. The VC PMI produces daily, weekly and monthly information. Most of the information we publish on Seeking Alpha is weekly information, with some daily information.
The target that the VC PMI identified is $1437-1461 when the report was published on the 26th. The low predicted was of $1296-1278. The VC PMI provides a range where you can see the price action in relation to the volatility of the market at that level. Within that range, you can then trade depending on your risk tolerance and goals. That is a $44 per oz range for a profit opportunity provided for you as a self-directed trader to take advantage. What I do really does not matter. What you do with this market intelligence is really the bottom line.
The Bottom Is In
On Saturday in the report, it said that we were looking for a buy into that $1379-1380 area, the low was $1384.70 ($25 per oz profit), and when activated, after covering the shorts went about $1397, it pretty much confirmed that the bottom was in. It confirmed that the daily, weekly and monthly trends had bottomed. The targets were $1437-1461.
As I write this report at 9:10 am on July 3, the high so far is $1442.9. In terms of the chart, we identify areas with colors for supply and demand. The report stated to exit short positions at the B1 level at $1396 and the B2 level at $1378. You had a range as a trader. Depending on how many contracts you had, you could begin to scale out of your positions in this price range.
The VC PMI Automated Algorithm
We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets," "The Power of Mean Reversion in Factor - Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages and momentum indicators. The science of Vedic mathematics is used to combine these elements into a comprehensive, accurate and highly predictive trading system.
Mean reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it's between 90% (sell 1 or buy 1 level) and 95% (sell 2 or buy 2 level) probable that prices will revert to the mean by the end of the trading session. I use this system to analyze the gold and silver markets.
Strengths And Weaknesses
The main strength of the VC PMI is the ability to identify a specific structure which price-level traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level and the market closes above or below these extreme levels.
The day trading program then confirms that a higher fractal in price has been identified and the market will move significantly higher, although the same principle applies if the market falls significantly. The price closing above the S2 level indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean and prices should revert back to the mean.
The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly and monthly.
The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly or monthly average.
To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check out our Marketplace service, Mean Reversion Trading.
Disclosure: I am/we are long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.