Trend Trading Clearly Explained for Indexes & Precious Metals

I'd like everyone to welcome Chris Vermeulen from GoldAndOilGuy.com. Today I asked Chris to take a look at the indexes and precious metals and how to trade the trends clearly. Recently gold and silver have been prominent on the Trader's Blog, so this post is very timely. Please enjoy, comment below, and visit GoldAndOilGuy.com for Chris's free reports.
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Stock Market Trend Trading Clearly Explained for Indexes and Precious Metals

This report is a mix of both current market action and educational material on how stocks and commodities trend (move).

Since mid October I have been on the look out for the market to top or make a multi-wave correction. The market did top in January and has formed an ABC retrace (3 wave correction).

The question everyone wants to know is, is this market topping out or just a bull market correction?
Well the brutal truth is no one really knows what is going to happen next. So the only way to make consistent profits in the market is to clearly understand the main technical analysis skills (Chart Patterns, Trend Lines, Support & Resistance, and Volume). You must also understand how to manage your money/trades. I scale in and out of positions during key support and resistance levels to keep downside risk low.

One of the toughest parts of trading is “Trading Discipline”. If you cannot take losses easily then trading is not for you. You must be able to exit a trade when your stop level has been reached or you think the trade is starting to go wrong. Holding onto losers will blow up your account very quickly.

Other than those key skills, all you can do is watch the charts and re-evaluate each time a new bar (candlestick) pops up on the chart.  Remember to trade with the larger trend of the chart 2-4 times longer than your actual trading chart.

Example: If you trade the 30 minute chart for entering and exiting trades, then you should be watching the 2 hour chart (120 minute chart) to understand the full picture.

Market Trends and Price Movement

As we all know, when the market is trending up we are seeing a series of higher highs and lows and the reverse for a down trend. We also know there are several different ways a market can top before reversing. The charts below show how the market generally moves on all time frames.

The market will top and bottom in 1 of 4 ways which are shown below:

Sideways Trend – A consolidation or triple top
Head & Shoulders – This is a great trading pattern
Double Top – Lower volume rally and sharp selling once high is reached
Blow Off Top/Bottom – This is when volume spikes and the price moves quickly (great for panic trading)

Silver and NYSE Daily Trend Trading

Take a look at the charts below and you will see exactly how the market moves and where the market is currently trading.

SP500, NYSE, GOLD Futures, US Dollar Index – Intraday Charts

These charts clearly show how the market moves and what to look for. As you can see the trends are down with consolidations (pauses). This is the exact reason why you must trade with the trend and not do counter trend trades. Bounces are more like sideways movements making it very difficult to try and play bounces in a down trend.

If you focus on selling at key resistance levels during a downtrend then you will find trading much more profitable. That being said, we did go long on Feb 5th because of the extreme oversold market level.

Typical Day Trade During Volatile Times

My trading strategy is designed to work in either bull or bear market conditions.  And what makes my strategy so versatile is that when the market gets volatile (choppy) I will focus more on intraday trades as opposed to swing trades. Being able to switch trading styles as the market changes is critical.

My trading strategy has been extensively tested across the board in both bull and bear markets, trading different investments vehicles like ETF’s, futures or CFD’s.

My main focus is gold and the US stock indexes such as the Dow 30, SP 500, Nasdaq, and Russell 2K.  However, when I see another investment chart screaming at me for participation, I will get us involved.
For example, Florida had a terribly cold weather front move through which froze oranges across the state.  It was a prominent story on CNBC as orange juice reached 2 year highs on this particular Friday afternoon.  I took a look at the chart and it was screaming at me to short it.

It turned out that one $3,000 contract of orange juice netted $2,800 in profit within 5 hours when the market reopened the following Monday. It’s the odd trade like that which I like to keep my eyes open for.

My Short Trading Setup – Rough Guideline

1. Assuming the trend on 2hour and 1hour charts are down
2. Increased volume during sell offs, and light volume on rallies/rising prices
3. Entry is best at Fibonacci retracement level which is also at a previous resistance level
4. Set Stop just above the resistance level you are expecting the current price to stop.  Exit if this top is penetrated and wait for a new opportunity.
5. Cover half of your position just before the investment reaches the first level of support level to lock in gains and reduce overall risk.
6. Once the price of the investment starts to make a new short term high, exit the balance of the position. (This is graphically demonstrated in the charts below).

DIA – Dow 30 Index Fund Day Trades

This chart quickly shows the two intraday setups for shorting at resistance levels. Both trades worked out well and even better for futures and CFD traders because the trend continued down for hours in the evening.
Anyways, the first short was a great play but we did not see the big sellers step in, which led to a reversal and the price continued to move higher taking us out for a small profit.

The second short had huge selling volume indicating sellers were back in control. This play we held into the close. The next chart shows how this is done.

DIA – Dow 30 Index Fund – Step By Step Play

The chart shows how these low risk setups should have been traded according to my trading strategy to maximize gains while minimizing risk.

Market Trend Trading Conclusion:

As you can see, this is not rocket science, rather a set of simple trading guidelines and basic money management. The tough part is waiting for a trade to mature or waiting for the next trade. It is very easy to start doing trades for no reason other than you are simply bored sitting at the computer.  Waiting for high probability opportunities is crucial.

In short, stocks and commodities have been in rally mode for all of 2009. So far this year prices have started to slide forming some bearish looking charts. But it’s not the end of the world by any means. Depending what happens in the next 1-3 weeks we should know if the market is back in rally mode or still in sell off mode.

I am somewhat neutral at the moment because from a technical stand point there are just as many arguments/technical analysis points for prices to move up as there are to move down. When I get in this situation I just sit back and wait for a clearer picture before putting my money to work. "When In Doubt, Stay Out!"

I will update subscribers tomorrow on our current long positions as we need to tighten our stops to lock in profits on our Feb 5th extreme panic selling buy signal.

Get my Free Trading Reports: GoldAndOilGuy.com

Chris Vermeulen
TheTechnicalTraders.com – Swing Trading, Day Trading & Forecasting