Four ETFs to Watch

04/09/2010 12:01 am EST

Focus: ETFS

1) SPDR Gold Trust ETF (GLD)

You can see how this chart has evolved from pattern to pattern as it bottomed over time.

Wednesday, we had a breakout, and I expect to see a pullback, which is normal when prices gap up and break out of a pattern. An entry point would be considered on a pullback if the proper criteria were met.


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2) iShares Silver Trust ETF (SLV)

Silver has always been much more volatile than gold, which is why the pullback early this year was so strong, and why the recent rally has also covered so much ground. As you can see silver has broke out above resistance, but is now looking overbought. A pullback, or at least a pause, in precious metals is expected.


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3) United States Crude Oil Fund (USO)

Oil has made a nice move higher the past week, but I feel it will pull back also in the coming days for a breather. There are a couple sizable gaps to fill all the way back down to $40.50.


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4) United States Natural Gas Fund (UNG)

This natural gas chart looks very interesting. In the chart, I am comparing the 2009 low to today’s price action. From looking at the chart, natural gas is way oversold and in dire need of a relief rally. As you can see, the sharp rallies that occurred just before both the 2009 and the current possible bottom look identical. This type of price action is very common to see.

Let me explain: When an investment is this oversold, meaning it has sold lower for weeks, if not months, then there is a large and growing number of traders looking to pick a bottom. Once those traders see prices start to move higher, they all jump in thinking it’s the bottom. Sometimes it is, but more times than not, it’s just a sucker’s rally. A ton of traders are in cash waiting to take advantage of the drop. But the market will keep pushing higher until fears that it’s not going to pull back. That’s when the new money buys back in, fueling the grind higher.

After all the bottom pickers jump on the train and there are no more buyers, the price tends to drift lower, scaring these traders back out of the position. Eventually, a new low is made and everyone is shaken out of the investment. The crazy part is that just as they get out, the price usually turns around and does exactly what they knew was going to happen: It goes up.

Most traders have the direction correct, it’s just their timing is off. My general rule is that when I see something, I wait another bar. Sometimes I keep saying that to myself after each new bar until I am confident in the predicted move or price at which I can get into the position.


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By Chris Vermeulen of TheGoldAndOilGuy.com

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