SMI Education: Breakaway Gaps, Metals

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Breakaway Gaps, Metals

The chart pattern(s) everyone is watching
June 3rd, 2012
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Hello:

Last week turned out to be a critical week in the markets. I am sure you're getting a ton of newsletters covering the carnage in the broader markets so this newsletter will keep things simple by answering the question: How do I trade this market now?

Please note: We sometimes send out real-time updates via twitter: If you wish to receive these updates, simply follow us: our handle is structuredmkts. (http://twitter.com/#!/structuredmkts)

S&P: Breakway gap

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Under normal circumstances, we don't really look at just the day session of the S&P because so much activity occurs in the overnight markets. But, occasionally, you see a pattern that causes you to stop and take a good hard look. On Friday, such a pattern developed.

For most of the prior two weeks, the market attempted to hold a critical support level and rallied all the way back up to its 20 period exponential moving average on the daily charts(on May 29th). But, then, after closing on it's highs that day, it gaped down and opened close to the lows, trapping all longs but still holding the support level. However, on Friday, the first trading day in June it gaped open below the support level and never looked back. Now, the beginning of the month tend to have a bullish bias - seeing this bearish action during a normally bullish period combined with the gap AND bonds holding new highs indicates to us that the carnage isn't over yet. So, to trade this market, simply short all bounces using Friday's high as the disaster stop. If we are right in our reading, we should not close that gap until much later.

Metals - Gold and Silver

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Gold had a great breakout on Friday and, in fact, hit its target and then some from the triangle shown. So, the question is - what is the next stop? A look at the daily charts show that we are still inside a much larger triangle and that this bounce could take us back to the upper trendline of that larger triangle. This chart is shown below:

EURCHF Monthly Crossrate Chart

At this point in time, we would be partial to buying all pullbacks in gold until we hit 1700-1725 (basis August CME contract).

Now, what about silver? Silver seems to be lagging but it did close at the upper end of its triangle. Because of the way it has been acting, even a break of this triangle would cause me to only buy DEEP pullbacks. But, the pattern is there and you have to respect an upside breakout given how the other markets acting. See chart below:
EURCHF Monthly Crossrate Chart

The Trade(s)

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Short S&P on pullbacks - set disaster stops at Friday's high. Frankly, you can short DOW, Russell or Nasdaq as well.

Buy pullbacks in Gold. Because Friday's lows are so far away, stops will have to be set at intraday levels depending on the chart patterns.

Silver - IF upside breakout from triangle, BUY deep pullbacks only or just stand aside.

Wheat: This pattern failed completely. We are standing aside from this market.

Important Risk Disclosures and Legal Disclaimers - This stuff is important!

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First you should realize that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS! The risk of loss in trading commodities can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

BETA Program News and Information

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Quick Links...

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Contact Information

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