In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Low-Risk Setups for SPY, GLD, and USO
08/03/2010 12:01 am EST
As we all know, there is an unlimited amount of ways to trade the financial markets. Each person sees the market in a different way, has different skill sets, trading experience, and risk-tolerance levels. While some individuals create and use complete systems to make money, there are some very basic trading strategies that still work well and require nothing more than basic charting, patience, and a little money management.
Let me explain:
S&P 500 Index Trading Fund (SPY)
You can clearly see the longer-term trend, which is down (blue trend line). But from simply drawing a couple trend lines and looking at the MACD (momentum) indicator, you can see there is a possible trend reversal taking place. So far, SPY has broken out of its downtrend line with a four-day pop, and it’s now pulled back down to test support. A close below the trend line or the 50-day MA would be the exit points if the market did start to go south.
The S&P 500 is still stuck under major resistance, its 200-day moving average. But is trading above key support levels (20MA, 50MA, and trend line). I can feel the tension in the market between traders, and we are about to see a big move once a breakout to the upside or downside is established. At this time, it’s best to be in cash or have a small position with a protective stop in place. Once a trend starts, there should be some low-risk entry points along the way. If we see a strong reversal to the upside on Monday or Tuesday, I would expect big buyers would step in to catch this new trend up.
SPRD Gold Trust Shares (GLD)
Looking at the price of gold, we can see the trend is still down along with the momentum. A breakout would be the first step towards a possible entry point, but I prefer to wait for a pullback after the breakout has taken place. Once we get a test of support, I look to enter a position once there is a strong reversal candle to the upside. From there, I draw a new support trend line from the previous low and connect it to the new pivot low (bottom of reversal candle). That becomes my new protective stop.
Gold still has some work to do before I would even be interested in taking a long position for a swing trade. But on a short-term time frame (intraday charts), gold looks to be forming a low-risk setup that I hope unfolds for my subscribers this week.
NEXT: Low-Risk Trading Setup for USO|pagebreak|
United States Oil Fund (USO)
Oil has been trading in a large bearish pennant for the past two months and is nearing the apex of this pattern. The longer-term picture of oil is bearish, but the most recent dotted trend line and the 20/50 MA crossover is signaling some strength. Also, the momentum for oil is positive, and that helps support the price also. Again, if this were to break out to the upside, I would wait for a low-volume pullback to test the breakout level and then enter on a reversal back up.
Oil is one of the more challenging commodities to trade because it is affected by the US dollar, political events, and weather. In short, even if you had the analysis and timing correct, there are other factors that move the price of oil on a regular basis and could quickly turn the trade against you. That being said, keep trades small when trading oil.
How to Find Low-Risk Trading Setups
In short, trading can be complex, simple, or somewhere in between. You can spend 14 hours or 20 minutes a day analyzing it, depending on what investments you trade, whether you’re trading full time, or just checking up on longer-term investments.
This analysis and basic strategy shown above can be profitable if followed correctly, and it works for stocks, commodities, and indexes. It’s just to show how simple one can swing trade the market using very basic analysis. Personally, I use a much more complex strategy incorporating 15+ other data points, which allows for precise entry and exit points.
By Chris Vermeulen
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