This is the monthly gold Variable Changing Price Momentum Indicator (VC PMI) report for September 1, 2019.
"It does not take a master technical analyst to look at the gold and silver charts and see that the markets are in a major breakout to the upside," Equity Management Academy CEO Patrick MontesDeOca said. "The question is what do we do moving forward for traders who are still on the sidelines waiting for some kind of opportunity to meet their criteria to enter the market on the long side?"
Without any question the market has broken out through the short-, intermediate- and long-term resistance levels. To calculate the prospects of trading in the gold market, we looked at the monthly supply and demand levels for September.
Market on the Upside
The VC PMI identified the average price for September as $1502. With the market trading above the average price at $1529.40 as of the close on Friday, it appears that we are entering this month with a bullish trend momentum. This automatically identifies the target for the month above the average price as being at $1592 (Sell 1 or S1 level) with a 90% probability, if activated, of reverting to the mean from that level. The second extreme level above the mean, Sell 2 (S2) is at $1655, has a 2-to-1 relative implied volatility and has a 95% probability, if activated, of reverting to the mean.
We do not know what is going to happen, but by watching the price and seeing whether these targets are activated, we can be alerted about a new setup from the S1 or S2 level. If you buy into these levels, when activated, there is a 90% or 95% probability of the market going against you. If you sell at those levels, you have a 90% or 95% probability of the market going in your favor.
Market on the Downside
If the market moves in the other direction, the Buy 1 (B1) level is at $1439 and the Buy 2 (B2) level is $1349 for the month of September.
If you are long the market coming into this month, and if the $1592 price is activated, then you probably want to look at taking some profits off the table.
"This is a defined mathematical structure that provides targets for you to manage your portfolio intelligently," MontesDeOca said.
If the market reaches the S1 level, there is a 90% probability of the market reverting to the mean. Therefore, we need to keep an eye out for this possibility. Use $1502 as your protective level, whether you are using a stock, option, future, cash or whatever as your instrument.
Structure and Record
The gold market's monthly trend momentum is bullish. The targets above the mean are $1592 to $1655. If you are long, these are levels to use to unload some of your positions or manage your profits. Your protective level is $1502. If we close below $1502, it begins to activate the extreme levels below the mean of demand of $1439-1349.
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/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.