Is Gold Rolling Over Again?

I published the chart with the two CNBC headlines in the January 19 Profit Radar Report. It just illustrates nicely how the change of price affects sentiment and vice versa. A risk trend followers hate and contrarian investors love.

We bought gold at 1,140 (as per the November 5 Profit Radar Report recommendation) when no one wanted to own it.

Now, it’s more fashionable to own the yellow metal again.

This alone is reason to be cautious, but it’s not the only one.

The gold seasonality chart below, featured in the January 25 Profit Radar Report, shows that seasonality soured around January 22.

Although it’s a couple of days old, the assessment published in the January 27 Profit Radar Report is still fully applicable.

The easy money in the gold trade has been made. More attention and mental stamina is required now. Sunday’s PRR showed seasonality is turning bearish. Commercial traders (‘smart money’) have further reduced exposure.

The chart shows that current trade is important from an Elliot Wave perspective. Gold appears to have completed a 3 wave rally. There are now two options:

Gold will trace out a wave 4 correction followed by wave 5 higher. Target for a wave 5 high is around 1,xxx (reserved for subscribers of the Profit Radar Report).

Longer-term, a complete 5-wave rally will be followed by a corrective decline and at least one more rally leg.

Shorter-term, a wave 4 correction could become a pain to manage. Waves 4 tend to seesaw over support/resistance levels, therefore using the trend channel support at 1,275 as stop loss could kick us out at the wrong time.

A 3-wave rally is indicative of a correction and would translate into a relapse to new lows. This option is unlikely, but theoretically possible.

We can either take our profits and run or commit to endure a potentially painful correction in exchange for further gains. I like to keep things simple and recommend taking profits. Lets cash in gold around 1,295 and GLD around 124.20 for a nice 13.5% gain.”

Gold has since dropped to 1,255. The SPDR Gold Shares (NYSEArca: GLD, iShares Gold Trust (NYSEArca: IAU) and Market Vectors Gold Minders ETF (NYSEArca: GDX) also peeled away from their recovery highs. I still think gold, GLD and IAU will see higher highs, but it will take some patience to get there.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59%.

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MACD Triggered ‘Gnarly’ S&P 500 Signal

Living in San Diego, I get to pick up some surfer slang, such as: “Hey dude, this wave was gnarly.”

Coming from Germany, I had never heard the term ‘gnarly’ before. A look at the urban dictionary shows synonyms such as crazy, wicked nasty or rad.

Turns out, in San Diego beach cities, many things are ‘gnarly,’ not just the waves (this could include an accident, girl or even a breakfast burrito).

On January 22, when the S&P 500 closed at 2,064, MACD triggered a ‘gnarly’ buy signal (see green line in chart below). Why gnarly?

Via the Profit Radar Report, I noted the MACD buy signal and warned:

According to proprietary internal supply & demand measures, this recent rally leg has been weak. However, the S&P closed above the 20 and 50-day SMAs for two consecutive days and trend following technicals like MACD have turned positive.

The purpose of the current up move is to lure investors back into stocks and elicit a level of optimism before the hammer drops again.

A reversal lower would certainly baffle many market technicians. My research still favors the odds of a reversal.”

In hindsight, it becomes obvious that the MACD buy signal was indeed wickedly gnarly. The S&P 500 dropped like a rock right after the buy signal. This illustrates the pitfall of basing buy/sell decisions solely on popular gauges, such as the 20 and 50-day SMA or MACD.

Yesterday’s decline triggered a MACD sell signal, but support around 1,988 has held thus far. Depending on today’s close, the S&P 500 (NYSEArca: SPY) may even paint a green reversal candle.

Today’s close could be important for the short-term, but – with or without bounce – I anticipate another leg down as outlined in the January 19 Profit Radar Report:

More follow through strength is likely with resistance at 2,040 – 2,075. The odds for another leg starting at 2,040 – 2,070 are above average. Potential down side target is 1,960 – 1,900. Going short around 2,050 is most attractive from a risk/reward perspective. We do expect new highs eventually, but another leg down first looks to be in the cards.”

Perhaps we get another bounce to 2,075, followed by a drop to 1,960 – 1,900 and new recovery highs thereafter.

Continued updates will be available to subscribers of the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59%.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Key Commodity Index at Major Inflection Point May Provide Clues for Oil

As MVP of the commodity sector, oil is usually in the spotlight (especially after a dizzying 60% drop) while most of the other commodities operate in the shadow.

The Reuters/Jefferies CRB Commodity Index, the Granddaddy of broad commodity indexes, sports an interesting chart right now.

The index has reached the lower end of a trend channel that’s defined a multi-year down trend.

Is that a buying opportunity? Is oil near a low?

First we should look at the composition of the Reuters/Jefferies CRB Commodity Index.

In 2005, the index was revised from an equal weighted to a 4-tiered grouping system, designed to reflect the significance of each commodity. Here is the group weighting:

  • Agriculture: 41%
  • Energy: 39%
  • Base/Industrial metals: 13%
  • Precious metals: 7%

Crude oil makes up 23%. The next biggest components are gold, natural gas, corn, soybeans, aluminum, copper and live cattle with 6% each. Silver accounts for only 1%.

Since oil is the heavy weight of the Reuters/Jefferies CRB Commodity Index, trend channel support should be watched carefully for anyone fishing for an oil bottom.

Under normal circumstances this would be a low-risk opportunity to buy the Reuters/Jefferies CRB Commodity Index (trend channel could be used to manage risk).

However, there is no Reuters/Jefferies CRB Commodity ETF.

Broad based commodity ETFs include the PowerShares DB Commodity Tracking ETF (NYSEArca: DBC) and iShares GSCI Commodity ETN (NYSEArca: GSG).

DBC has a strong correlation to the Reuters/Jefferies CRB Commodity Index, but the actual chart paints a different story.

DBC already dropped below trend channel support and is near its all-time low. Aside from a Fibonacci projection level at 14.13, there is no technical chart support.

This makes it hard to manage risk effectively. Traders looking to bottom pick should probably use the Reuters/Jefferies CRB Commodity Index trend channel as stop-loss for any long positions. Oil ETFs include the United States Oil ETF (NYSEArca: USO) and iPath Oil ETN (NYSEArca: OIL).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Will European QE Send Stocks Soaring?

It’s not that we need a chart to show that QE pumps up Wall Street, but here is one anyway.

The obvious question is whether Europeans QE will do the same for European stocks as U.S. QE did for U.S. stocks.

Liquidity drives the markets, so the logically answer is ‘yes’.

However, there are a few other variables.

  • U.S. QE was unleashed when the S&P 500 was near 12-year low. European QE was announced when German and English bourses are at or near all-time highs.
  • The situation in Europe is more fragmented and complex than in the U.S.
  • The U.S. dollar was at a multi-year high when U.S. QE was launched. The euro is at a 11-year low.

Despite all the differences, European QE was received similar to U.S. QE. Here’s what one German politician said:

“QE makes the rich even richer. It is a drug for the stock market. It drives up stocks. But the money should flow in the real economy, not banks.” Sounds familiar, doesn’t it.

Here are a few headlines commenting on the ECB’s move:

  • MarketWatch: Why European QE is bearish for US stocks
  • Fortune: Larry Summers: The ECB’s QE won’t work
  • FoxNews: Five reasons why ECB won’t save continents dying economies

U.S. stocks rallied for years despite all the persistent haters (me being one of them).

The stage seems set for a European stock rally.

However, the Vanguard FTSE Europe ETF (NYSEArca: VGK) cautions buyers against rushing in. VKG is about to the reach double technical resistance.

This doesn’t mean it can’t go higher, but buying before a speed bump is rarely prudent. A breakout would be a better reason to buy (and it would offer a good stop-loss level). The charts for five other European ETFs look similar. View Top 5 European ETFs here

What about the regions strongest stock index? Germany’s DAX is trading at all-time highs, and is about 3% above important support at 10,000. Further gains are possible, but a close below 10,000 would put the QE rally on hold.

Unfortunately there’s no ETF that closely tracks the German DAX. The iShares MSCI Germany ETF (NYSEArca: EWG) is severely lagging behind the DAX. Otherwise it would be interesting to buy EWG and short SPY (S&P 500 SPDR) or go long the DAX with a stop-loss just below 10,000.

The U.S. QE experiment has taught us that it’s foolish to bet against the Federal Reserve or its international counter parts … and yet I have a tough time believing that European stocks will take off right away.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

What are the Best Europe ETFs?

Will the European Central Bank’s QE lift European stocks? This question deserves its own article, which can be found here: Will European QE Send Stocks Soaring?

Here is a look at the top five (+1) Europe ETFs:

Top 5 Europe ETFs:

  • Vanguard FTSE Europe ETF (NYSEArca: VGK) – 0.12%
  • iShares MSCI EMU ETF (NYSEArca: EZU) – 0.48%
  • WisdomTree Europe Hedged Equity ETF (NYSEArca: HEDJ) – 0.58&
  • SPDR Euro STOXX 50 ETF (NYSEArca: FEZ) – 0.29%
  • iShares Europe ETF (NYSEArca: IEV) – 0.60%

ETFs are known for being inexpensive (expense ratios are listed behind the ticker), but there are factors more important than the expense ratio.

For example, the Vanguard FTSE Europe ETF and the iShares Europe ETF have a 15% exposure to Switzerland. The remaining three ETFs have virtually none.

We can’t talk about Europe ETFs and ignore the Swiss National Bank’s (SNB) massive currency move. Abandoning the 1.20 EURCHF floor caused a 15% drop in the SIX Swiss Stock Exchange.

Whether the Europe ETF of your choice includes Swiss stocks or not can make a difference going forward. I’m not necessarily advocating one over the other, but investors should be aware.

The WisdomTree Europe Hedge Fund ETF is designed to provide exposure to European equities, while at the same time neutralizing currency fluctuation.

When the euro is weak, the WisdomTree Europe Hedge Fund ETF will beat an un-hedged European equity fund, but when the euro is strong, it will underperform an un-hedged European equity fund.

I happen to believe that the euro will stage a surprising rally in the weeks/months ahead, which – if the case – will render the WisdomTree Europe Hedge Fund ETF ineffective. More detail: The Biggest Trap of European QE

A blend of the Vanguard FTSE Europe ETF and SPDR Euro STOXX 50 ETF seems like a good combination for anyone looking to own European stocks. Is now the time to own European stocks? A detailed analysis can be found here: Will Eurozone QE Send Stocks Higher?

What About Germany?

How about just buying the European leader, German stocks?

There are a number of Germany ETFs, but none of them tracks the Deutscher Aktien Index (DAX) well.

The iShares MSCI Germany ETF (NYSEArca: EWG), the biggest and most popular Germany ETF, owns 59 stocks and claims targeted access to 85% of the German stock market. However, it has a correlation of only 0.59 (on a scale from +1 to -1), and is trading 25% below its all time high, while the DAX is at an all-time high.

If there was a great Germany ETF, it might make sense to go long German stocks and short U.S. stocks (pair trade: buy EWG, sell SPY).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

The Biggest Trap of European QE

The cat is out of the bag. The ECB will buy up to euro60 billion a month from March 2015 to September 2016. Purchased assets will include government bonds, debt securities by European institutions and private-sector bonds.

Why? Eurozone inflation is negative. Deflation is bad news, and pumping money (QE) into financial markets is hoped to fight deflation and spark inflation.

Inflation, by definition, erodes the value of a currency. The obvious conclusion; eurozone QE should send the euro lower.

But if something is too obvious, it can obviously wrong.

Let’s take a look at what U.S. QE did for the U.S. dollar.

The chart below plots the U.S. Dollar Index against the various QE programs.

QE1 saw wild dollar swings, but no discernable down side bias. In fact, the dollar rallied when QE fist started.

QE2 didn’t sink the dollar either and the greenback actually rallied during QE3/4.

Headlines like ‘Why quantitative easing is likely to trigger a collapse of the U.S. Dollar’ proved incorrect.

The euro lost 18% since May 2014. This is one of the most pronounced declines in recent history.

In 2008 the euro lost 23.1% before bouncing back, in 2009/10 21.5%. Technical support for the euro is not far below current trade, so shorting the euro is akin to picking up pennies in front of a train.

Contrary to conventional wisdom, investors should put the CurrencyShares Euro ETF (NYSEArca: FXE) on their shopping list and start exiting the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

This Underestimated Indicator is a Powerful S&P 500 Forecasting Tools

Chart gaps are one of the most rudimentary and most effective S&P 500 forecasting tool.

What is a Chart Gap?

A chart gap is a price level where no trading occurred. It occurs when price makes a sharp move up or down, leaving a gap.

Most gaps (at least for stock indexes) occur in the morning. The often reflect underlying strength and at times a temporary change of trend.

How to Use Gaps

Gaps often mark temporary trend changes, but more often they represent ‘unfinished business.’

They are a blank or void on the chart and for whatever reason stock indexes (in particular the S&P 500) almost always fill open gaps eventually. Gaps act like magnets.

Here is where gaps have been most helpful in recent years: We’ve seen a number of shallow pullbacks in 2013 and 2014, and every time stocks dropped by a few percent, investors thought the bull market is over.

Many times however, the S&P 500 (NYSEArca: SPY) started the correction with a chart gap, indicating price will eventually (most times it was sooner rather than later) come back to close the gap.

With an open gap, the S&P 500 basically just dropped its poker face and offered a glimpse in its card. The message: “I’m just bluffing. Don’t worry about the correction, there will be new all-time highs.”

This chart shows some of the more obvious chart gaps and the corresponding comments by the Profit Radar Report.

Chart gaps (along with another indicator I call ‘secret sauce’) told us that pretty much every correction since mid-2013 will be reversed and followed by new all-time highs.

Currently there are two open chart gaps that merit our attention. One quite a bit below and another quite a bit above current trade.

I expect both gaps to be filled. The Profit Radar Report shows in which sequence.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.