A Close Look at the Overall Market with Gold and Oil

06/21/2010 11:11 am EST

Focus: COMMODITIES

Over the years, we have seen the stock market make some pretty exciting moves for shareholders. This year alone, there have been some interesting events that caused wild market swings that most of us did not think could happen. Things like countries going bankrupt and the May “flash crash.” Also, the BP oil leak, which looks as though its about to kill not only businesses around the world, but a large population of animals and fish that our planet will never be able to get back. It’s been a crazy year!

It sure would be nice if the financial situations between all the countries could be resolved, and if we could have some proper regulations on banks and the financial system to minimize fraud and manipulation. From the looks of everything, we still have a few years before things get sorted out, fixed, and somewhat stabilized.

Below are some charts showing where the Dow, gold, and oil are currently trading and my thoughts on them.

Dow Jones Industrial Average ETF (DIA) Daily Chart

The past 12 years, we have seen the DJIA go through some large bull and bear markets, providing those with trading experience the opportunity to generate large profits in both the bull and bear markets.

Recently, we have seen the DJIA pull back and test the key pivot point, and it has now started to bounce. Although this price action is positive, I have my doubts about another bull market rally because of how the chart looks. I focus most of my analysis on chart patterns, volume, and market internals. These allow me to monitor the overall heath of the market on a daily, weekly, and monthly basis. Using these techniques, I am able to pull money from the market consistently.

This year, we saw some extremely heavy selling in May, which could have been strong enough to shift the trend from an uptrend to a downtrend. I call these large volume candles “get ready spikes.” If they are green, then we are looking for higher prices, but when they are red, it means distribution is starting and lower prices could start to form in the coming months.

The DIA chart below looks to be forming a very large head-and-shoulders pattern, which is currently trading near the top of the right shoulder. This pattern is very bearish and points to much lower prices in the next couple years if the major support level (neckline) is broken.


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SPRD Gold Trust ETF (GLD) Daily Chart

The chart of gold shows the same cup-and-handle pattern that I have been talking about for a while now. Last week, the price of gold made a new high, breaking out of this pattern. We could see the price of gold start to work its way up to the $1400-$1500 level over the next three to six months, which calculates to $140-$150 on GLD.


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US Oil Fund (USO) Daily Chart

Oil ETF USO has been trending down for a couple months and recently put in a nice bounce from the May low. I feel as though oil is forming a bear flag and could head lower in the coming weeks. Until it breaks the key resistance level, traders must be cautious if they have any long trades right now.


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Trading Conclusion for Dow, Gold, and Oil

In short, I’m bullish on stocks for the short term and think we could retest the April high in the next month or two. But after that, the market could roll over and we could see much lower prices from there. Or we could see the indexes break out and start another leg higher. During volatile times like we are in now, we must trade with caution until the overall health of the market clearly indicates the direction of stocks. Until then, focusing on low-risk setups and taking profits quickly is the safest trading strategy.

Gold looks to be set up for a strong move higher. I am hoping for another dip to shake out some investors before it continues its march upwards. Oil, on the other hand, is trading near a key resistance level. Only time will tell if it can break through and start a rally. If not, then we will see the market struggle.

Chris Vermeulen of TheGoldAndOilGuy.com

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