Current Thinking

by Mike Endres, Market Trend Trader | February 3, 2010

The only thing can be said with assurance about any market (stocks, bonds, options, futures, et al) is that what goes up one day will turn around and go down the next or vice versa. Further, when the general market sags, it tends to drag everything with it, even securities that are in different sectors of the market and have nothing to do with one another. It can be frustrating to own gold stocks and, say UUP (dollar bull ETF) as a hedge, the general market swoons over a CNBC report and both of your holdings go South. But sometimes it happens, so get over it, get used to it and be nimble on your trading feet!

We are in a period of crises in our financial, credit and equity markets. I feel no one would argue with me about that statement. Nothing - absolutely nothing - has been done to clear the debt overhang that stretches over us all very like a frozen breaking wave along Hawaii's North shore. Sooner or later (and I'd bet sooner) the freeze will give way to a thaw and the wave of debt and over leveraged financial markets will come crashing down on all our heads.

So how the hell does one protect yourself from what you know is coming? There are several ways to do it, none of them easy, simple or totally satisfying. The best way I know is a triple step procedure:

First, pay off every debt you owe.

Second, put 25% of your assets into gold and silver coin in an 80% gold, 20% silver ratio. Buy the gold coins with lowest premium and a few bags ($500 or $1,000) of circulated pre-1964 American silver coin. Smaller gold coins are to be desired as they will be easier to dispose of, should you have to do it, but they will have a higher premium on them as they are more popular. My fondest dream is to pass the hard money along to my grandchildren intact. That means things have not collapsed 'twixt now and then!

Third, shift your investment strategy from long to short.

90% of investment profit over time is made by getting in at the right time and getting out at the right time. Anyone buying the Dow in 1990 is barely even now and there are a lot worse examples than that.

As a senior member of club (just turned 72), I've been investing in gold, silver, stocks, bonds, options, puts and calls, currencies and OTC pink sheet crap for over 40 years. I've been broke a number of times and while never being rich (by today's banking bonus standards) over the past 30 years, I've gotten better at trading than I ever was at "investing".

Today, we'll illustrate how markets can turn on a dime and provide at a minimum, a short term profitable trading opportunity. Over the past few weeks, we've seen the overall stock market swoon, gold breakdown through support and literally no place to hide except in cash and dollar bull ETF's and market bear ETF's.

First, take a look at the dollar Index, DXY.

At close of market yesterday, DXY gave a speculative sell - since the 5 DMA had not rolled over, it is not a valid sell - but in this case with everything else backing it up, I believe that the current dollar rally is about to correct (large? small correction? I have no clue but DXY will either drop or will waffle sideways for a while). REMEMBER! A correction in any trend can be satisfied by the trend reversing and going the other way for a while OR it can equally well be satisfied by moving sideways over time. The MRO is telling us the trend will change - it just doesn't know whether it will move sideways or reverse and drop. If it drops, the MRO is also incapable to telling you how long the correction will last - just that one is coming.

Now we'll check out the dollar bull ETF UUP.

You can see that it is in lockstep with DXY as one would expect - but it's nice to have two confirming signals.

Next we have VTI - my proxy ETF for the entire broad market.

Yesterday's market close gave a very sharp BUY signal, meaning that the market losses since mid-January are likely to be corrected and the high of the second week of January will be tested. At a minimum, a short term buy signal has been given for the over all market meaning stocks will exhibit strength for the near future. If VTI can eventually break higher than $58.25 or so, the uptrend remains in place and we will extend our stock trades into the intermediate term.

Now to Gold and Silver. GDX (the gold bug index) first.

Yesterday afternoon, GDX finished giving us a valid Buy. So, for at least the short term, we can expect some strength out of the gold stocks and an attempt to climb back to the long term uptrend that was broken the second week of January.

SLV, our silver trust followed through as well with a speculative buy (i.e the MRO rolled over, the %R turned up but the 5dma has not turned up yet). It sure looks like it will, so I'll consider this a speculative buy in the precious metal area.

Now all of these changes may be short term - I have no way of knowing. But I do know that I will be involved in initial short term trades in all these areas, picking the strongest relative strength stocks in each and going long or short as the change of trend indicate.

Good luck - for the winds are going to blow from a different direction for a while.

Notes on the MRO: The MRO is a mathematical formula the generates both buy and sell signals for any tradable security, commodity or future returning a high, low and close at the end of the trading day. A rising MRO signals weakness. I falling MRO indicates strength. The reversal of the MRO along with the reversal of the simple 5 DMA of the tradable item and the %R (lower part of the the chart) signals a change in direction of whatever is being plotted. Generally when the MRO becomes locked below or passes through zero into negative territory, a bullish move is in progress. When the MRO is going up or locked in above zero, a bearish situation exists.

Contact Information

Mike Endres | Market Trend Trader | Tavares, Florida | Email