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Tharp's Thoughts Weekly Newsletter (View On-Line)

August 12, 2009 - Issue #436

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Article

Finding Your Sweet Spot in Today's Market Environment by D.R. Barton, Jr.

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Second Edition of Peak Home Study

Trading Tip

Gold Analysis and Strategy for August 2009 by  Florian Grummes

Ask Van

Beliefs and Trading Systems

Feature

Finding Your Sweet Spot in Today's Market Environment

by
D.R. Barton, Jr.

“The only man I know who behaves sensibly is my tailor; he takes my measurements anew each time he sees me. The rest go on with their old measurements and expect me to fit them." 
~George Bernard Shaw

My son Josh is becoming a fine golfer. After playing for his high school team as a freshman, he’s continuing to improve. I expect him to break 80 regularly by the end of the fall. 

Watching with admiration as he worked on his game, I have seen him develop two specific behaviors that are beneficial for trading as well. First he has begun to make really good on-course adjustments. If he starts pushing the ball right or tugging a little hook to the left, he is making the changes within a swing or two to split the fairway again. 

Every good trader or investor has to make similar adjustments to their game in the markets. It doesn’t matter if you’re trading a purely mechanical system or a rule based discretionary system, or something in between. In any case, you need to make adjustments at prudent intervals as your trading systems provide you with feedback relating to the dynamics of the market environment. “Set it and forget it” systems are a myth; the markets are way too sophisticated for that approach to work.

The second thing that I see in Josh is his ability to consistently perform in certain situations. He is uncanny with putts from about 4 - 5 feet. He has developed a great instinct on draining those putts, which comes from many hours of practice. I know that when he gets in that situation he has a definite advantage.

In a similar way, certain strategies have distinct advantages in certain market situations. And right now, swing trading strategies are finding a definite advantage in the current market conditions.

In the hyper-volatile markets of last fall, many swing trading strategies had difficulty working well in the extreme volatility. Many of the best designed swing trading strategies gave fewer entry signals because the market conditions were less than optimal. Others had to be completely “switched off” when volatility reached almost 2x the highest levels ever seen before. At that time, day trading was the way to go as most intraday strategies feast on volatility.

On the flip side, extremely low volatility periods generally produce fewer opportunities for quality moves. In many swing strategies, these conditions also usually mean fewer quality signals. This happened in the June 2003 – January 2007 time frame, though there were several interspersed periods of moderately increased volatility.

Swing strategies typically thrive in moderate volatility climates like we have right now. Since mid-spring, volatility has been contracting and has produced an almost ideal climate for swing traders. 

So what characterizes swing trading? Swing trading can be roughly defined as catching the “swings” in market price in a time frame that is between an overnight trade and 10 – 20 days (depending on who is doing the defining). In short, swing trading looks to catch swings within the larger time frame trend. This means that swing trading concentrates on intermediate trends or intermediate reactions against larger trends.

While swing trading happens to be in the market condition “sweet spot” right now, it is also one of the hottest developing areas of trading. The swing timeframe is growing more attractive to a large number of people for several reasons:

• Swing trading strategies can fit into almost anyone’s schedule. Screening can be done and orders can be placed or adjusted before or after market hours.

• Many consider swing trading to be the timeframe that provides the most efficient use of trading capital.

• Swing time frames can present many more opportunities than longer term trading.

• Transaction costs in swing trading are lower than day trading.

• There are swing trading styles for almost any type of trader: trend followers, breakout players, pullback traders, counter trend players, channel traders—the variety is almost endless.

I’m excited that the markets are cooperating so well with the timing of our swing trading workshop in September. I’ll be teaching Tactical Pro Swing Trading along with Christopher Castroviejo. We’ll show the tactics that he and I have developed and used in a combined 60+ years in the markets. We’ll be digging into mechanical strategies while adding some street smart savoir faire to the mix. We also have a great section on using options in the swing timeframe that can add a “power” tool to your systems toolbox. 

Christopher and I will teach all of the key swing trading steps in detail at the workshop, but I’ll share a few with you here:

• Learning curves can be shortened but there’s no substitute for spending time studying the markets and the sectors with their individual characteristics. Make it your daily practice to look at charts of the broad indexes as well as the sectors and individual stocks that interest you. Every swing trader that I’ve talked to or modeled does these daily reviews with a disciplined zeal!

• Keep your stops with a ruthless determination. In every workshop we hear horror stories from traders who knew better but still violated this key rule of trading survival.

• Know the beliefs behind your trading strategy inside and out. The better you understand why your strategy has an edge, the better you’ll be able to extract profits from the market based on that edge. 

In addition to the three day swing workshop, we are going to teach an optional fourth day specifically dedicated to band trading. These powerful methods are an excellent complement to the three days of swing strategies taught at the workshop.

For example, band trades are setting up very well right now. A quick glance at the chart of Nvidia (NVDA) below shows that it is following the broader market’s volatility contraction and that standard Bollinger Bands are containing the price action quite well.

Viewed as a broad 'style' of trading, band trading and the other swing systems we teach can be rewarding from several perspectives. For a lot of traders, swing trading fits into even the busiest schedules. Swing trading offers numerous opportunities to catch lots of moves that the longer-term players miss. It also helps you get out of the way of some of the more dangerous market moves. 

Attend the Tactical Pro Swing workshop and you’ll leave with the confidence to trade profitably at a whole new level. 

We look forward to seeing you in September.

Great trading,
D. R.

About D.R. Barton, Jr.:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  "drbarton" at "iitm.com".

 

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Trading Tip

Gold Analysis & Strategy

August 2009

By 

Florian Grummes

My name is Florian Grummes. I live in south Germany and am a self-employed independent professional trader and investor in the gold market. I started focusing on this market in 2003 after listening to one of Van’s programs in which he discussed the DOW/Gold Ratio.

I write this gold market update every two weeks to have an ongoing trading plan that guides my trading in the gold market. As I learned from Van we trade only our own beliefs about the market. Therefore, please be aware that this report represents, and is based on, my own beliefs about the markets and gold. This analysis is meant to be an educational service for you and does not represent a recommendation for any kind of investment. If you have any questions, feel free to email me at florian.grummes AT web.de. Also, if you want to sign up for my free newsletter, drop me an email.

 

1. Gold Spot Price Analysis

1.1. Gold in USD (1 ounce = US$953.90)


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• It’s really getting interesting in the gold market. The big question is, “Will gold break through the US$1,000 level and advance to new all-time highs or will it once again fail while trying?” I am still quite skeptical at the moment. I expect another sell off before gold can run to new highs, but let’s have a look at the charts first.

• Three weeks ago gold could not conquer the US$950-957 level. A few unsuccessful attempts at a quick sell-off pushed the price down to US$925. But from here gold showed incredible strength again and within just a few days it went up to US$970. Last Friday, gold dropped after a volatile session to US$954 with essentially no changes compared to the week before. Although it is still summer, the volatility rose strongly last week. It seems something will happen soon.

• The technical picture still looks very positive. Gold is building up more and more pressure to break out of the triangle and through US$1,000. The rising 50d MA (US$943.26) and the 200d MA are moving up parallel. All trend lines are in place and in the last month every pull back was bought immediately. 

• Unfortunately the little double top at US$970 (Tuesday & Thursday last week), as well as the big distance to the rising 200d MA (US$887.35), is reminding us to stay alert. Also, the upper Bollinger Band (US$971.55) is the next resistance. Most importantly, the intraday-reversal in the dollar on Friday could be the start of a surprising US dollar rally. 

• So far, the correction since the all-time high in March 2008 (US$1,037) is still in play. A sustainable move above of the US$1,000 level is necessary to end the correction. 

• Short term, another attempt up to US$970-990 seems possible. But an immediate renewed dollar weakness will be necessary for that. If the August monthly close is above US$960, it is highly likely that we see a breakout to new all-time highs very soon.

• On the other hand, if gold were to fall below US$944, we should witness another sell-off down to at least the US$900-920 level. 

• The long term technical and fundamental perspective for gold is still super bullish. The next price targets are the Fibonacci‐Extensions of the complete correction since March 2008 at US$1,250 and US $1,600. 

• The DowJones/Gold ratio is now at 9.80. The worldwide stock market rally should have reached its final stage this month.  At the end of August or at the beginning of September the bears will return. We have witnessed very similar price action during this spring and summer compared to the DAX 8 years ago. In 2001 the DAX recovered within 6 months from 3,539 up to 5,467 points and then dropped down to 2,188 points within the next 12 months! 

• Long term, I expect the price of gold to move toward parity to the Dow Jones (=1:1). This means we are in a long term bull market in gold (and also commodities) and in a secular bear market in most of the stock markets. However, this cycle may take years to play out.

1.2. Gold in EUR (one ounce = 672.47€)

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• In EUR, gold is moving slowly but surely higher.

• The rising 200d MA (662€) has been tested twice in July and is still an important support. If that support fails, we will see much lower prices. But from a technical perspective this is pretty unlikely at the moment.

• Instead, after getting back above the falling 50d MA (670€), gold should reach the 700€ level soon. Both Bollinger Bands were contracting during July down to a range of less than 18€, which indicates that a breakout is next (which I think will be to the upside).

• As a EUR Investor, the price of gold calculated in EUR is far more important for you than in US$. Don’t fool yourself: from a longer term perspective gold is still a very good buy at or below 675€ an ounce.

1.3. Gold COT Data

• The commercial short position is again at frightening highs! This was not the case in 2005 or 2007 before the big rallies in the gold market started. The commercials now have a larger short position than they did even at the end of February 2009. At that time gold dropped from US$990  to US$863. 

• One can argue that the commercials have been short and “wrong” for the last eight years (i.e., since 2001). They always build up their position in rising markets over time and then cover their short positions after a dramatic panic-driven sell-off. They surely earn a lot of money trading like this. 

• I still believe that a new rally in the price of gold can start only if the commercials reduce their short positions to below 100,000 contracts. Below US$900 the commercials should cover more of their positions. If we see the next sell-off down to US$845-880 to get rid off the weak hands, the COT data should look very positive again.

18.04.2009 = -153,419 ( PoG Low of the day = US$ 885 )
19.05.2009 = -183,065 ( PoG Low of the day = US$ 920 )
26.05.2009 = -208,136 ( PoG Low of the day = US$ 939 )
02.06.2009 = -226,521 ( PoG Low of the day = US$ 970 )
23.06.2009 = -194,430 ( PoG Low of the day = US$ 913 )
14.07.2009 = -182,287 ( PoG Low of the day = US$ 917 )
21.07.2009 = -204,226 ( PoG Low of the day = US$ 944 )
28.07.2009 = -202,521 ( PoG Low of the day = US$ 934 )
04.08.2009 = -228,193 (PoG Low of the day = US$ 950 )

1.4. Gold Seasonality

• August is a pivotal month for gold because it tends to start a seasonal market trend that lasts 6 to 9 months. Normally starting around August, the price of gold rallies until the spring; therefore, the seasonality perspective supports higher prices in the weeks and months ahead. 

1.5. Gold Sentiment

• Most of the time big rallies and new bull markets are born in a panic sentiment after a strong sell-off (e.g. DOW in March). At this moment, most of the market commentators and the “gurus” expect a breakout “very soon.” To me this current sentiment feels way too positive, and I am not planning to move with the crowd.

1.6. Conclusion 

• The next few weeks will be very interesting. There is a lot of technical evidence for a final breakout to the upside very soon. But if the long-term bear market in stocks shows up again, gold will be hit as well. I recommend watching the charts very carefully. 

A rise above the US$ 990-1000 level confirms the seasonal pattern. If this is the case, we should see the next leg of this gold bull market and prices reaching to about US$1,500 in spring 2010. 

A pull back below US$940 indicates another wave of correction down to at least US$900-920 or even US$845-880. This could last until early October before gold might be ready to challenge the 1,000 level again. By then (with a better COT picture), I expect Gold to be successful.

Gold in USD US$954 the technical picture is very positive, pull backs are being bought immediately Bullish
Gold in EUR 672€ slow breakout  Bullish
Gold in GBP 572£ sideways Sideways
COT Data -228,193 extreme short position of the Commercials Bearish
Dow Jones/Gold Ratio 9.80 the bear market rally seems to come to an end soon Bearish
Gold/Silver Ratio 65.3 silver is stronger, positive for the precious metals Bullish
Gold/Crude Ratio 13.47 doesn’t have a lot of meaning at the moment Sideways
Gold – ETF stocks No big changes and hardly any influence on the market Sideways
Gold Seasonality August is a pivotal month for precious metals, from now on the seasonality is positive  Bullish
Gold Sentiment Sentiment is almost euphoric Bearish
Gold mining stocks HUI Still strong, but no breakout above of the 380 level yet Bullish
Spread Spot/Future US$1, the bullion market is tight (review issue 12/09) Bullish
US Dollar Weekly reversal top last Friday? A surprising Dollar Rally seems possible Bearish
US Dollar COT Commercials net long, a surprising Dollar Rally seems possible Bearish
Bullion market Demand from India seems to stabilize Sideways
Jewelry demand Still very low demand Sideways

2. Gold Mining Stocks Analysis

2.1 Gold bugs Index USD (366.27 Points)

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• Gold mining stocks and the HUI have risen in parallel with the DOW, DAX, most of the stock markets and gold during the last couple of weeks. 

• So far, the rally ended last Tuesday at 380 points. Since then the HUI has been moving down slowly. A failure of support around 360-365 would be a sell signal.

• Until now, the buy signal created by the MACD in early July is still in play. The upper Bollinger Band (US$383.95) makes higher prices possible in the coming week. The flat 50d MA (351.56) and the rising 200d MA (297.32) are running now about parallel as they do also on the gold chart. Everything looks OK there.

• The HUI did not confirm the last high in the gold market on Thursday, which is a clear warning sign. Most of the time the gold mining stocks usually run ahead of gold itself. 

• I have to remind you again that gold mining stocks are moving parallel with the broad stock market. If we see a strong sell-off in the stock market this autumn, the HUI will be beaten down too. That case will present us with a great buying opportunity. 

3. Additional Reading Recommendations

 Mark Faber

Jim Sinclair

Richard Russell

Bob Hoye

Stewart Thomson 

About the Author: Florian Grummes (born in 1975 in Munich) has been studying and trading the Gold market since 2003. Beside a lot of self-development workshops and seminars his experience in the gold market comes from trading and investing his own money to finally become a very successful self-employed precious metals trader and investor. Along with his trading business, he is also a very creative and successful composer, songwriter and music producer.

Disclaimer

Q&A

Beliefs and Trading Systems

Q: Van, you always talk about trading your beliefs about the market, rather than the market itself. But how do you actually decide what your beliefs are? For instance, I could believe that the market trends, because I see them on a chart with my own eye, and hence use a momentum based strategy,. I could also believe that buying "low values" is the only reliable way to make money, and hence use a value investor approach. How do you decide what your true beliefs are? Especially if several are incongruent? --Duncan

A: You know what your beliefs are. The fact that you are asking me "how to you decide what your beliefs are" simply suggests how little you know about your beliefs.

One of the exercises I give my Super Traders is to write down 100 beliefs about the markets. If you try to develop a system that doesn't match your beliefs, it won't work.

Van

 

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