In my last report on Seeking Alpha on August 6, 2019, we were able to identify the daily, weekly, and monthly trigger points in the gold market. As we looked at the annual report that we published September 28, 2019, the anticipated target of $1,476 was completed. We took a very conservative approach from that point on, as we identified the market to be trading at extreme levels above the mean. In that report, the monthly price indicator was telling us to sell at $1,471 to a $1,504 level. If you look at a chart from when the report was published, the market anticipated the target to be completed even above $1,500, as the market on August 13 made a high of $1,546.10 and, on the same day, came down to $1488.90. This was one of the biggest one-day moves that we have seen in the gold market in years. Is this the beginning of a historical increase in the volatility of the metals market?
We are using the weekly criteria for the Variable Changing Price Momentum Indicator (VC PMI), which is an automated algorithm written in C++ on the TradeStation platform. For the benefit of self-directed individuals, I am showing you the indicators and how our traders use those indicators to trade based on the daily, weekly, and monthly structure. In these reports, we focus on the weekly structure, for swing or position traders. You can also include it as a day trader. You can try our Marketplace Mean Reversion Trading free trial to get regular weekly reports on the gold, silver, and E-mini S&P markets.
The mean for next week is $1,520. The market closing above $1,520 has activated the sell 1 (S1) target of $1,552. If the market reaches $1,552 and closes above it using the 15-minute bar, it activates the $1,579 target. If you come into next week with long positions, you can use these levels to reduce your position, to hedge or take profits. What artificial intelligence tells you is to expect distribution of supply. Economically and mathematically, these levels will attract sellers or supply into the market. The artificial intelligence tells you to wait until the price activates these levels. It also prepares you with an alert to identify the trigger point once the target is completed. The first contact (S1) is to take profits and then go neutral, or to lighten your positions depending on how you are managing your risk. S1 and Sell 2 (S2) are levels with a 90% and 95% probability, respectively, that the market will then revert from those levels to the mean of $1,520.
If you consider the VC PMI to be a GPS for traders, this area identifies target zones for you to use to manage risk, according to your size or portfolio. It does not give you guarantees of a profitable trade, but it identifies the extreme levels above or below the mean where the most probable trades can be made.
If the price next week closes below $1,520, it will activate a bearish trend momentum, negating the bullish trend momentum from Friday. It would also activate the extreme levels below the mean of Buy 1 (B1) $1,493 and the Buy 2 (B2) of $1,461. If the price activates these levels, there is a 90% probability from the B1 level and a 95% probability from B2 that the market will revert from those levels to the mean. Coming into next week, the VC PMI has identified for us if the price comes down to $1,493 to $1,461, there is a high probability that it will find buyers or demand. This is where accumulation of supply has been identified.
As we come into next week, we have used the VC PMI to identify that the average price is $1,520. The trend momentum is bullish, activating $1,552 as the S1 level and $1,579 as the S2. Your stop is close below $1,520, then go neutral. A second close below $1520 activates the B1 level of $1493 and the B2 level of $1461. There is a 90% probability that if the gold market reaches the B1 or S1 levels, it will revert back to the mean of $1,520, while the B2 and S2 levels have a 95% probability of the market reverting back to the mean.
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 NUGT. 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.