The rally back to 11,400 in the Dow and 1198 in the S&P brought stocks full circle back to pre Standard and Poor’s downgrade levels.

But, the road to get there was treacherous and emotionally upsetting… especially for short-term traders.

I feel the best approach to this market has a couple of main keys to success:

• Buy limited risk high probability option plays that have enough time to be right.

• Manage the position by watching the weekly price charts for new relative highs and lows. Make exit decisions based on trend evaluation.

One key to my evaluation of the markets is by using the most appropriate data set.

In this case I’m talking about weekly analysis.

By using weekly analysis we can diminish outlier events. This in turn helps to evaluate trends. The goal is to look at investments using a marathon view game plan unlike the short-term focus of the 100-yard dash.

A quick scan of thirty commodity markets – the ones that have enough liquidity for option strategy execution – identifies the overall trend. Up, down or sideways are the only possibilities. When looking for new opportunities either a pullback or breakout on the weekly price charts can trigger a trade decision for entry or exit.

Overall, respecting long-term established trends has treated my Resource Trader Alert members very well over the years.

Let me show you what I mean…

Here’s an example that compares daily action in gold versus the three-month data, take a look:

With such a short-term snapshot the above chart doesn’t give us much help in determining a profitable trend.

Now, notice the consistent new highs each week to support the overall uptrend. That’s the power of keeping your eye on the broad picture through weekly data.

So… what now?

Volatility may very well continue. Indeed, it may be technology and information driven – there’s a lot to be said about the psychological difficulties processing the newfound abundance of financial data.

But it is important to keep an eye on the weekly trend.

The extreme lows last week put stock indexes at 20% off the recent highs. The recent buying recovery has placed prices a reasonable 12% from the peak. One week does not change the trend, not yet anyway.

This market action isn’t so crazy after all. Keep your eyes on the major trends – this philosophy has treated my elite readers well so far and looks to continue.

Sincerely,

Alan Knuckman
Penny Sleuth

Collect Consistent Gains in Any Market was originally featured in the Penny Sleuth.

Commodity contracts actually led the way higher…

Crude, cocoa, sugar and live cattle built on their price base.

The corrections in the overall bullish trends proved to be buying opportunities when prices were down.

Of course, this is easy to see in retrospect. Buying dips has been an easy, but profitable, strategy since the depths of the financial crisis.

Solid overall trends remain intact. What has been going up continues to rebound and rally. Other declining markets in Treasury yields, Natural Gas and the US Dollar are resuming the dominant downswing.

And here lays a big potential mover…

Silver never quite hit the $50 an ounce price at late April highs. The combination of the multi-year trend that doubled prices in 2010 and again in 2011 plus the emotion of a crowded trade led to asset unwinding.

The Silver Springboard

Sideways trading on Silver for the last two months within a range has held the key support…

The $30 level had tempered upside rallies three times!

In addition, the dollar has formed a triple top at 76 to set the tone for lower greenbacks. A similar dollar channel looks to resume the downtrend inversely to the silver uptrend when you look at the six-month charts side by side.

It doesn’t take much expertise to identify the extreme silver highs coincide with the extreme dollar lows.

You should watch this trend. As the dollar continues to fall, silver could rise even higher. Just be sure not to chase the highs…you will want to buy near support to maximize potential profits.

[The Sleuth’s Note: Last month, Alan introduced you to playing silver’s pullback. If you missed it, simply click here. There are many ways you can play silver right now. One way is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV). If ETFs are not for you, you can start by looking at these two companies: Silver Wheaton Corp (NYSE:SLW) and Coeur d’Alene Mines Corporation (NYSE:CDE).

Plan your trade...you could see profits on the next silver rally.

But of course, before buying anything...make sure to do your research.]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

Springboard Your Way To Silver Profits was originally featured in the Penny Sleuth.

A perfect example is the effect the news has had on the silver market recently. But, with silver prices dropping, it presents new buying opportunity for long-term commodity investors.

While many good information sources that play it straight do exist, some have an agenda and ideology that almost prohibits an objective view. The hype around short-term events for viewers devalues long-term planning and investments. Unfortunately this transfers fear through osmosis, prohibiting clear, unbiased decision-making— all in an effort to make sure you return for more.

The conversations about a double-dip recession, government default or Dollar demise are economic possibilities, but not probabilities at this time. Fiscal issues must be addressed, but the market action is telling a more optimistic story. In early May the stock and commodities markets were at multiyear recovery highs. When and if the market direction changes will just mean additional opportunity.

Can’t Dive Below 335

Major profit-taking sales in commodities from the May 2 high point has seen asset unwinding back to the January breakout point. The Commodity Research Bureau Index (CRB) of resources as a whole has dropped 10% in the mid May to the key technical 335 area, which was a halfway recovery of the 2008 extreme highs to 2009 extreme lows. As a trader, this news is a potentially bullish buying area for a number of markets that are now near long-term uptrend supports. The reward-to-risk is much more attractive at these levels for continuation of global demand growth.

The overall basket of commodities has been in an overextended, yearlong strong upward trend. One of many major pullbacks, the last few have been bullish buying opportunities, which encouraged top pickers to go short. Timing a major market reversal is nearly impossible and almost always a gambler’s ruin.

Buying against support and trend levels has been successful in the past. A close below the 335 halfway 2008-2009 recovery point on a weekly basis would get attention and renewed evaluation of the trend. It is definitely too soon to make that call.

Silver Sliver

A solid example of retracement to support is in the oft-emotional Silver market. Too far and too fast caught up with long traders who overstayed their welcome when danger signs flashed brightly. The unwinding triggered built-up exit stop losses that were protecting profits for most.

The explosive run to highs near $50 an ounce had begun with a breakout above the key $30 cap on prices in February. Attempts were made in mid- and end of December, with the actual never-look-back bust-out coming a few months later. The uptrend is still intact, and the recoil to the original level needs to be watched for a halt in the current decline.

Now that the luster is diminished in Silver, it becomes an attractive potential play.

[Editor’s Note: There are many ways to play silver right now. One way you can play this pullback is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV)]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

How You Can Profit from the Silver Pullback was originally featured in the Penny Sleuth.

Through my homefront perspective dollar weakness isn’t all that bad. It benefits the US corporations through increased overseas sales with the relative price discount. It also benefits commodities. They rise as the dollar drops because foreign currencies have more buying power for goods denominated in US currency. More gold, oil, and stocks can be purchased and add to the bullish market tone.

Although this take on the situation still doesn’t answer the global conundrum of currency valuation— which clearly has some added profit opportunities.

Lately, questions have been raised who will rise to the top and become the go to reserve currency in the basket of bad choices. One non-currency answer that’s often posed is our profitable friend, gold. Indeed, gold could possibly fill the gap for financial stability and asset value retention.

Other than gold, three main commodity countries exist in the major currency market.

First up on the list, the Australian Dollar. But lately the aussie has been held in check by the issues in Japan. The geographical proximity of island nations make this currency heavily dependant on exports and the economic situation of the now 3rd largest economy in the world.

That leaves two big currency winners from the crude oil run that have more upside: the Norwegian Krone and the Canadian Dollar.

Oh Canada…

Our neighbor to the north has a solid balance sheet partially because of the resource based economy in the times of increased global demand. The financial crisis was not as hard felt in Canada and the recovery much faster as commodities reversed higher from the extreme lows. Take a look at the chart:

“The peak-to-trough decline in Canadian real GDP,” according to Wells Fargo, “was 3.3 percent, not as severe as the more than 4 percent decline in the United States and a far cry from the 6.4 percent decline in the United Kingdom.”

With interest rates held low at 1% any Canadian tightening monetary action in the future should be supportive of the currency. Higher rates mean less CD$ and make each loonie more valuable.

Strong Canadian dollar support sits at par and the next pullback will be a buying opportunity that you should keep your eye on.

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

May 10, 2011

One Great Place to Plant Your Assets was originally featured in the Penny Sleuth.

The Commodity Research Bureau Index (CRB) made new multi year highs Monday, April 11 before reversal. Many overextended bullish resource runs need some healthy profit taking pullback. Straight up is not sustainable and the flush out of protective trailing stops clears the way for higher moves.

It is worth mentioning that the markets need to be judged on a weekly basis to prevent overreaction to daily events. One day does not change a major trend, the follow through or failure to confirm that counter move is important to evaluate. EVERY downward push has recovered to new post crisis highs in assets across the board.

Human nature has many investors exit on downturns. Personally it’s worked better for me to exit positions on strength — clearly that’s also what I  strive for when I make recommendations to my Resource Trader Alert subscribers. Surging moves occur when traders are pilling in and acting emotionally about a play. They are finally convinced and don’t want to miss out on profits, often without analyzing the risks. That can be the best time to sell — when everything looks its best.

Over the past year, those who went short on selloffs to pick tops in assets have been used and abused. The window of opportunity on the downside is very small with precise entry and exit to catch the quick profits. The most impressive action has been not what the market has done but rather NOT done over the last months in the face of potentially destructive news. Short-term bursts of selling have failed to break the bull market.

Action late April showed a slowing of the negativity and only a modest flight to safety in bonds, up less than one percent. Stocks were down 1% as Alcoa earnings disappointment led the news. Contrast that with the 3-4% declines in crude and gold and the price action appears to be unwinding as opposed to the real fear of a market reversal.

The reverse of entry on weakness provides a much better level to start. The downside risk is less if you can be patient and gutsy enough to buy when everyone else has exit anxiety. Resource expert Rick Rule stresses the “out of favor” approach to investing that has done him well and worth contemplation. Buy when there are sellers and Sell when there are buyers.

It ALL Comes Back to Commodities!
Alan Knuckman
Penny Sleuth

May 6, 2011

Should You Buy While Everyone Is Selling? was originally featured in the Penny Sleuth.

In retrospect that was clearly a “profitable” idea. But more than a few investors who acted on silver are scratching their heads, wondering just how long they should hold. It’s great to take gains in silver, but those gains aren’t real until you know when to get out.

This brings me to a recent reader question:

“I was wondering if you feel Silver will continue to run a bit more like Gold? (I know they run together, but wondered if silver has gone too far?)”
- C.B., Houston TX

For starters, markets can go much higher or lower than we think or we feel. When “think” is the key emotional measurement, it often leads to trouble and lack of trading discipline. Truthfully, the less you think, the easier it is to evaluate trading opportunities.

Every financial investment has the same time tested process and methodology. Here’s the list I’ve shared with my Resource Trader Alert readers in the past:

1.    Identify
2.    Execute
3.    Manage
4.    Maximize

The number one focus always has to be on risk: What is the downside, and what are the implications on the portfolio if wrong?

Only after determining that the potential rewards outpace the potential risks does it make sense to move forward with a trade.

My preferred strategy is to trade limited-risk options with enough time to be right. The option vehicle has unlimited upside with limited loss – that’s why they’re ideal for traders who can’t sit and watch the markets all day long.

Silver Psychology

As of this writing, the recent high price in silver futures currently sits at $49.82. That’s the level prices reached briefly on April 25. It’s also a historically significant price – you see, the long-standing target from silver’s 1980 rally (aka the Hunt brothers’ fiasco) sits at a round, psychological $50 an ounce. Gold had long ago achieved those 30-year-old levels and it only made sense that silver would as well.

Previously, we haven’t seen a major unwinding that made the reward to risk appealing enough for a bullish silver play. The danger has been too high for our entry criteria and the market has gone without us. Sometimes it is better to miss a play.

With the price chart accelerated to almost unsustainable levels a breakdown is in the works. We’re already seeing it in the market’s last few trading sessions.

[Editor’s Note: This pullback in price could be the ideal entry point for silver. If you’re not comfortable taking on silver options trades, there are more accessible alternatives to get silver exposure in your portfolio today. The easiest comes in the form of the iShares Silver Trust (NYSE: SLV), an exchange traded fund that holds physical silver on behalf of its investors.]

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

May 3, 2011

A Trader’s Take: Should You Still Buy Silver? was originally featured in the Penny Sleuth.

I focus on options with my Resource Trader Alert readers, and for good reason. The most important thing to remember is that no catastrophic financial losses occur with a limited risk investment strategy.  The absolute worst thing that can possibly happen is that the option expires worthless and the original premium paid is lost.  Disappointing, but not a game changer…

With high probability and solid reward to risk selection the winners will outpace losers by design.

But asset allocation is only part of the risk/reward tradeoff – another crucial element is knowing when to be bullish. For traders, bonds can be an invaluable indicator of the risk that other market participants are willing to take. They can tell you when it makes sense to be bullish.

All commodity assets (viewed by the CRB index) have jumped since September 2010.  As a result the appeal for guaranteed returns from Treasury Bonds diminished.  Lessening financial fears and lower yields made the safe bet unattractive while resource markets were in bull mode.

Bonds are a very important indicator that often moves inversely to stocks or resource prices.  The “flight to quality” phenomenon in times of crisis often illustrate the seriousness of events.  Bonds are bought with funds that unwind from riskier plays in other markets.  For the past few months bonds were sold for better returns elsewhere.

As an advisory service editor and former floor trader in 30-Year Bonds at the Chicago Board of Trade I often gravitate to the price action in treasuries.  They tell a supply and demand story with the print on the screen.  Is the flow of funds going into or out of the perceived safety asset based on current events?

Bonds, not stocks, are my first insight into the severity of an event.  That’s because stocks may react adversely to many, many inputs or just profit taking from a long hard run.  In fact, immediately after the Japanese earthquake Friday morning the quotes told me more than the news as information was being gathered.

Earlier this month, after an immediate initial jump, both bonds and the U.S. Dollar backed down as stocks recovered from sharp losses to reclaim the S&P 1,300.

The key was the fact that cash didn’t dump into bonds on the first signs of fundamental weakness in the market. That means that the bulls still have staying power as we approach the first trading days of April at the end of this week.

Truly, the events in Japan have had devastating human effects.   The concern for those impacted by the far-reaching results was felt personally with my parents in Hawaii celebrating my father’s retirement.  My early phone calls were unanswered as the tsunami was on its way to the island paradise.  Fortunately this wave was minimal and everyone was simply moved to higher ground for safety.

More issues are developing with bonds as a good arbiter of the results for traders.  In the meantime let’s hope for the best possible recovery scenario for those affected in Japan.

It all comes back to commodities,

Alan Knuckman
Penny Sleuth

Why Bonds Suggest More Bullishness in April was originally featured in the Penny Sleuth.

The number one role is price discovery. The markets bring buyers and sellers to determine the equilibrium price based on all of the fundamental information known. Opinions, insight and knowledge are transparent through the price of goods traded. Through this exchange mechanism it is easy to see exactly the price someone is willing to buy or sell.

Beyond determining the fair auction price the market’s second important role allows participants to hedge price risk.

Prices rise and fall with volatility, which makes it difficult to forecast long-term business inputs. Companies large and small can lessen exposure to changing prices by shifting that risk to someone else through the purchase or sale of futures contracts – that’s what hedging is all about. The money made or lost in the cash market for goods is offset by gains or losses in the commodities market.

Every major corporation hedges to stabilize and protect the price of their products. They use futures or options to lock in the costs for a widget, hamburger, soda or even from currency fluctuation on overseas revenue.

Just because the commodity rises, it doesn’t necessarily mean profit margins shrink and are therefore passed on to the consumer. Instead, money can be made in the market to compensate for price moves.

The purchase or sale of commodities contracts locks in price and provides a pseudo insurance mechanism. A true hedge is not designed to make money, but to provide a net zero impact of price movement. This shift of price risk to other parties is the primary function of the commodities marketplace.

My Resource Trader Alert subscribers certainly have enjoyed the satisfaction of big gains when others are complaining about higher commodity prices. The speculation is strictly for profit and the combined power of our trades can help add market liquidity. Additional buyers and sellers enable more efficient trade execution for the all-important economic function of hedging.

Speculation is heavy that the US Dollar will decline. Much of the increase in short dollar positions may be hedges as well. The drop from recent lofty levels adds a bullish undertone to dollar denominated commodities and equity assets. A cheaper US currency gives more buying power to foreign investors.

Typically as the dollar goes down, gold, oil and stocks all rise.

Airlines are highly sensitive to increases in their main cost of fuel. During the previous energy rally of 2008 some went bankrupt because of high prices while others actually made more money on their hedges than from passenger traffic! It continues to amaze that all are not responsible enough to protect themselves with market insurance by hedging.

The price of Jet Fuel, which is not a major trading market, and heating oil, which is, are highly correlated (see the chart below).

Airlines can easily buy HO calls to protect from upside price shocks.

You can hedge your food and energy costs by playing futures or options on these items – and if everything works out the way it should you could have plenty of profit leftover!

Sincerely,
Alan Knuckman
Penny Sleuth

March 22, 2011

Hedging Toward Future Profits was originally featured in the Penny Sleuth.

As you know this is a way of evaluating the strength and direction of assets for future movements. The numbers never leave my mind, instead they’re just pushed to the back to reemerge at the time of need for analysis.

Price and time are the two most important factors in trading. The strategies you use should depend on the market moving to higher or lower prices.

The oft-mentioned trading discipline of Identify, Execute, Manage and Maximize really focuses on the first two steps for determining success. Truly, a bad play with an improper entry cannot be managed into profit. Management and maximization can enhance returns (significantly), but not change the overall outcome very often.

The “plan your trade, trade your plan” axiom has to be hard at work. With proper money management and profit maximization you can look to exceed those numbers.

The days of watching tick-by-tick price moves are behind me – and should be behind you. The emotional energy spent is costly and does little to influence market direction. Prices will do what they are going to do and a weekly snapshot shows either new relative highs/ lows to continue or reverse trends. An extended evaluation period of time smoothes out day-to-day volatility that is best to the young with healthy hearts.

Money is made on both the downside and upside by traders, another accepted term for investors or speculators. In fact some of the best performing markets in coal, iron ore and copper have little if any speculation.

An enormous amount of money has been invested in the natural gas exchange traded fund UNG since its creation a few years ago. Nat Gas has been the ONE commodity that has gone down over the past two years.

Bullish speculators have been wrong – and haven’t altered that market in any way.

Unprecedented buying has not paid off or supported an unnatural market rally.

Another example of speculation is the purchase of shares of stock in any corporation. Unless you’re attempting to buy enough for majority rights to manage the operation you’re a speculator. Investment accounts are filled to the brim with speculative plays that would make a California gold rush prospector shy away from the outright risk that some people employ.

Risk control, probability, and hedging separate the trader from an outright gambler.

Nearly 100% of the trading volume is speculative in nature. Money is used to make more money…  sometimes right, sometimes wrong. Indeed, it is a right to be wrong.

Making and or protecting money is the core motive for investors in the financial markets. The objective of trading in stocks, or futures and options in the vast ocean of finance is a positive return on investment. Many different strategies over varying time frames are employed to squeeze profit from exchange traded products that can be described as capitalism at its finest.

Without risk it is very hard to receive reward in this market.

Sincerely,
Alan Knuckman
Penny Sleuth

January 31, 2011

Speculate Your Way to Profits was originally featured in the Penny Sleuth.

The extreme sensitivity to all financial news and world events had made gold, normally just a safe haven asset, look more like a currency in itself.

Remember how metal prices earlier last year maintained power even at the U.S. Dollar index highs in June 2010? That’s a true sign of internal strength.

Some analysts on Wall Street were starting to really beat the drum for gold in October of last year. There were risks to buyers at these extreme highs especially after gold, silver, copper, coffee, cotton, wheat, corn and soybeans had made the run.

Repeated profitable Resource Trader Alert metal plays has made me reflect on market trends versus bubble talk. The majority of so-called experts expect gold to move higher with $5000 and $10000 projections in print and on the idiot box for all to see.

While danger signs abound it may still be a prudent investment choice with a solid reward to risk plan. Always focus on risk/exposure and be prepared to live with the worst-case scenario.

This according to Bloomberg:

Gold dropped for a fourth day in New York, falling to a five-week low, as signs the U.S. economy is recovering and a stronger dollar curbed investment demand. Other precious metals declined.

A fourth daily drop for gold futures would be the longest losing streak since May. The metal reached a record $1,432.50 an ounce last month.

Gold futures for February delivery lost as much as $15.20, or 1.1 percent, to $1,356.50 an ounce, the lowest level since Nov. 29, and were at $1,358.80 by 7:53 a.m. on the Comex in New York. Prices are down 4.4 percent this week, the most since February.”

So with this recent pullback you could have a solid entry to profit from a modest move upward utilizing the power of commodity options!

On the equities side of things, the masses may be running to buy shares of the popular Exchange Traded Fund (ETF), SPDR Gold Trust (GLD). This ETF controls 1/10 of an ounce per share, but hardly gives you the profit potential you could gain.

The gold futures options we trade control TEN times as much and offer leverage on leverage with completely limited risk. So with a modest move of 9% in the price of gold, you could be able to cash in a 233% winner.

Sincerely,
Alan Knuckman
Penny Sleuth

January 21, 2011

Achieve Golden Riches Using Options was originally featured in the Penny Sleuth.