How to Trade Oil and Gold from Here

08/23/2011 9:00 am EST

Focus: COMMODITIES

Watch for oil to drift sideways in the short term before a new upward move begins, and use extreme caution trading gold on the long side, because a multi-month correction could be on the horizon.

The past few weeks have been fast moving with fearful investors clearly in control. As we all know, fear is the most powerful force in the financial markets, and when the hedge funds and the masses get spooked, they all dart in one direction like a school of fish.

Watching the charts and volume levels, it’s clear that money was/is flowing out of stocks and into precious metals as the risk-off, “safe” play. The SPDR Gold Trust (GLD) can be used quite effectively as a fear/sentiment indicator.

See related: 3 Great Equity Market Leading Indicators

To make a long story short, I feel as though Eurozone is going through something similar to what we (in the US) went through in late 2008 and first quarter of 2009. Keeping my analysis simple and to the point, it’s very likely that the Eurozone will resolve their financial issues and their stock markets will bottom in the next month or so.

If the market bottoms, so will the US market, which will be perfect timing, as I believe the market is currently oversold. Last week showed that sentiment is now turning bearish, and we have had a sizable pullback in line with normal bull market corrections.

My thinking, looking forward two to six weeks, is that stocks will rally, financials will rocket higher, bond prices will fall along with gold, and oil will rise because it will be a “risk-on”

trading environment again. Of course, all this would happen after the Eurozone resolves some of its key financial issues. I’m being very optimistic here, but we could be nearing a major low that could kick start another massive one-year rally.

Stepping away from that longer-term outlook, let’s take a peek at the shorter-term trends for oil, gold, and stocks.

Crude Oil 60-Minute Chart (One-Month View)

The recent price action for crude oil remains bearish/neutral, in my opinion. We saw a drift higher into resistance with declining volume, and then a sharp pullback on heavy volume. This tells me oil remains in a downtrend. It may be forming a base, which would act as a launch pad in the coming weeks for higher prices, but only time will tell, and I will update as price action unfolds.

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NEXT: Why Gold Bugs Need to Be Very Careful Now

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Gold Four-Hour Chart (One-Month View)

Gold has been performing very well for our entry point, but the recent price action is starting to look “toppy.” Gold and many commodities regularly form this pattern of three-wave pushes to new highs just before a sizable correction takes place.

I am bullish on gold long term and for a few more weeks, but I do feel as though there will be a multi-month correction in the price of gold soon, so be sure to tighten your protective stops as price moves higher.

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In short, the market price action is favoring very short-term traders (daytraders). We are seeing complete price swings—which can normally be swing traded—happen in just hours.

Until we get another extreme set-up or stabilization (less big headline news) in the market, we will be more of a spectator than a trader in order to preserve capital.

By Chris Vermeulen of TheGoldAndOilGuy.com

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