As two months, September and October have a chequered history in terms of stock market performance. Will 2010 be any different, well we have 6 weeks or so to find out and the usual measures of stock market sentiment are reaching extremes (of complacency).

There has been some commentary in the press about Gold reaching new highs on ‘investor jitters’ but the charts tell a different story with extreme readings of bullish sentiment. The run up since March 2009 topped out some time ago and although there remains a possibility intervention will create another liquidity fuelled rally higher – this is not likely to be before late November, early December.

This means now is an ideal time to reduce exposure to stocks and shares at least until the potential for a sizeable seasonal sell off has passed.

I have used a defensive strategy of taking less trades on average in 2010 than in 2009, but with many markets on the cusp of breaking out a more agressive approach is appropriate for the remaining part of 2010 – suitable as traders return on Tuesday after the long Labor Day weekend. Although 2010 has been challenging trading wise, the last 4 months of the year usually produce some very nice moves in markets – the recent rise in Gold to about level with historic highs indicates markets are generally at a significant point here and this increased interest will drive cashflows into the market that are currently sitting on the sidelines, so moving not just Gold but currencies too.

News to note since last posting this years:

Coffee (NY) – moving to new price level/value area over 170-180 from support at 130 – await sell off

Grains – moving higher on weather markets and Russian export controls – Buying

Stock indices – drifting higher/slightly toppy but only a year and a bit into cyclical bull market statistically

Metals – Gold moving/about to move to new highs; Silver just under $20, risk of sell off

US Crude oil – Trading sideways/ranging between high 60s and low 80s – no direction/trend

Euro – recovered from a deep sell off to 1.2000 tested above 1.3000 now risk of sell off on weekly chart basis

Aussie – Was toppy and now is testing those overhead resistance levels – to buy if breaksthrough 0.9400

Recent trade;

Gold Bugs Index near highs:

Retest of 1,000 round number level and top (descending) trendline

I personally hope it all ends well with Greece, it is a fantastic country to visit and it may well be best for the nation – and all round -  if they leave the Euro without further ado – as this would help domestic matters immediately, but it would come hand in hand with a default on their Sovereign debt – a story I highlighted at the start of this year.

Trading conditions have been challenging this year so far – but market move in phases and should the US Dollar weaken, commodities will swiftly move higher – on the other hand – if as I suspect there may be an equity market sell off (this being a bear market rally in my opinion) then it could hinder progress on the upside.

Anyhow – Gold is moving up, long from 1,158 and currently nicely in profit – a close over $1,200 will signal more upside and this will mean an add on position – if the market trends upward and this is a new ‘upleg’ it could run north of $1,400 and $1,500 by year end – one not to miss out on.

I watched with interest this week to much of the questioning of the Goldman Sachs ‘GS’chief.  These all were looking to understand why this firm was packaging up and selling these securities in risky residential mortgages while at the same time betting against them – was that a proper thing to be doing was the point of most of the questions – well, I think its safe to say GS isn’t a ‘not for profit’ organisation but the interesting answer given by the chief was that if they had actually known how bad the collapse in the housing market was going to be – then they wouldn’t have been only short in a “small” way (they made $500m profit in 2008 on the short positions) – they would have been massively short.  I think this was a fair point, even though a lot of the chief’s statements were pretty suspect.

So we can’t know what’s round the corner in the market but we take a position on it nevertheless with a defined risk at the outset, that’s the nature of the job.  The big winner in all that of course was the hedge fund manager John Paulson who made $3.7bn on his short positions in sub-prime.

Want to know what he’s up to these-days?  Well he recently setup a fund to buy up gold mining stocks at a time when they are underperforming gold… really though this is a longer term play on the potential inflationary tsunami expected to hit anytime in the next few years, and a trade against the US Dollar wrapped up in one.

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A general comment on the USD – if the immediate situation with Greece is resolved over the bank holiday weekend expect the Euro to gain next week which could cap the upside in the USD which is acting as a safe haven, especially with recent weakness in equity markets.  However, with most commodities trending higher despite facing the headwind of recent USD strength this year – especially gold – expect a significant rally on the upside in commodities and all assets traded against the USD in the event that it sells off in the coming weeks.

The Euro has been flat for most of February despite moving averages continuing lower.   Still lots to resolve fundamentally for the Euro.

Soybean and Wheat appear to be ready to work higher in the next month or two based on longer term support back to September 2009.

For 2010 I wouldnt be surprised to see the US Dollar higher over 90.00 and also Gold hold over $1,000.  Interest rates likely to stay low – so negative real rates mean Gold is attractive even if faced with a headwind of higher US Dollar so could work sideways before another move higher.

I am trading a slightly shorter timeframe off the 4 hour charts this year.

So a good trade but not that satisfying though interestingly Silver not following through on the move and other commodities falling off, Coffee hard, others Crude oil also falling.  Difficult period which I hope to capture a break lower in all these ‘risk trades’ maybe before maybe after Christmas, but soon.  It will be a good strong sell off which will be good to trade when the time arrives.

Also, note, interesting action in DX today and although stock market is oversold short term gold often surges a day or two prior to a major sell off – against this I still expect new highs in major indices by Christmas.

A chart that shows that effectively, the appreciation in Gold price since the start of the decade has been reset via the creation of increased monetary base.

This is a chart of a breakout of volume on the Rogers Ag ETN, from last week, this week even more upside has followed through.  Other Agricultural ETFs and ETNs, (ticker: DBA, DJP) also look to have rounded out a base and are looking up.  This all means potentially nice moves in agricultural commodities from here, personally trying to catch a longer term position trade and scale in.

Most trades have been riding high since the start of October with a tailwind of the recent US Dollar weaknes – a sharp reversal is likely, at some point, but in the meantime it is best to just watch closely and be ready and flexible to close out long commodity and Forex positions traded against the USD.

A recent trade in Soybean, on the break of the downtrend.  Certainly time to be a little cautious after a series of gains in Wheat, Soybean, EUR:USD, AUD:JPY, US Crude Oil and Gold in the past week or two.

Second is Wheat which interestingly, appears to have near enough completed its downtrend and could a a good point to accumulate a new long position – reference the Weekly ADX extreme low reading.

The much followed volatility index ($VIX) or “fear gauge” is still falling indicating increasing complacency in the markets.  Usefully Proshares offer QID an ultrashort product that fairly well correlates to $VIX which can only be traded in the futures, or on some spread betting platforms.  Personally I prefer the opportunity to purchase it as a share in the Proshares ETF, QID, as it can be done in the pension account.

There could be a bit of base building to be done here – but over the next 2 months a scale in trade looks attractive, maybe adding 1/5 per week, or depending on market action.

Also, will the USD strengthen – I think its possible in the v.near term.

This is truly a lovely looking chart to a technical trader like myself.  Notable features are the supportive 50 week moving average since 2005, breakouts at about $460, $730 – slightly rebuffed at the $850 area (old 1980 high resistance) then on to test $1,000 for the first time in 2008 and rolling over after hitting a high around $1,030 at the end of the run.  Then the mid 2008 anomaly, unwinding, deleveraging – whatever you want to call it – then sense returns and price is supported as a second attempt on $1,000 happens in early 2009 – but it was too far too fast.  Where we are now is a very strong trading point with the recent break north of $960.  Trade it with me, I was long at $960 recently for a fast $30 move, now long again for any follow through over $1,000.

Recent trades in Gold:

More trades and the years results in 9 futures markets available to view at: spreadtraderpro.com

This time could be different as the charts have been in what could be called an ascending wedge pattern.   Any close above the recent high and $80 looks likely – likewise a close under c$55 trendline intersect would indicate further weakness.

Trades at spreadtraderpro.com

The S&P put/call ratio or $VIX is worth keeping an eye on as it is unlikely to fall below 20 (currently 24ish) – before a sharp reversal meaning a return to risk aversion in stocks.

Other markets are likely to tag along, especially commodities that were not spared in 2008 sell off – the only real winners being cash and Treasuries.

Big name commentators have gone on record to suggest a ‘strong dollar’ scenario in the coming months – this has support from the charts – and Eurozone bank writedowns could provide some impetus.

Gold over $1,000 mark? yes, at some point, but a major breakdown before it takes  off in its seasonal rally – November to April time would not be out of the question, given the obvious chart pattern developed since the start of the year.

Well, as summer moves into autumn things could get choppy again from a volatility point of view, if the rally in stocks fizzles out and more grim economic numbers/writedowns from banks flow through the system it may be time to trade short most markets as risk appetite falls.  The US dollar which recently has been looking more likely to fall to the low 70s (DX index) has in the past week made a rebound and is in the process of confirming a bear trap technical pattern.

So, while many markets may retreat, the US Dollar and Treasury markets could show strength in this scenario.  Timing is of course key, but as we close in on the fourth quarter probabilityincreases that markets that have traded sideways over the summer will break for a concerted move.

Detailed trading history is available for free Spreadtraderpro.com

Here is a site with my trades, spreadtraderpro.com

Later this year could see some fundamental shifts in the currency markets, with the US Dollar potentially resuming its decline, which will lead to gains in the commodity currencies like the Australian and Canadian Dollar. The Euro and GBP could benefit too, but national debts are sky high in Europe and could lead to some competitive currency devaluations, we’ll see.

The stock markets continue to price in a slightly brighter future – though may have gotten ahead of themselves recently…

Natural Gas is one to watch as it has hit multi year lows, the seeds of the next price spike are being sown in this market.

Altogether it is shaping up to be another very interesting year to be trading the markets with many opportunities shaping up in the weeks ahead.

http://podcasts.odiogo.com/silverstein-on-commodities/podcasts-html.php

Its an interesting show, as it is very genuine in showing the real emotion these novice traders experience as they risk just a few hundred pounds (or Dollars) on their first trades – some almost quit.  I think it might turn out that none of the trades were with ‘real money’ in week two – but that’s just me speculating!

Worth a watch on the BBCs iPlayer if you are overseas.

Van Dam who funds the project from his own pocket piles on the stress – his only criterion for being part of the project are to be able to handle stress and also, be good at maths.

I found a piece on Van Dam and agreed with the comments – you need to find your own style and way, “there are no rules, you need to develop your own.”  This reminded me of the Douglas book, where he suggests the market offers unlimited possibilities and is an unstructured environment, so different to the social one we are accustomed to – which accounts for much of the stress in trading – unless you align your beliefs with the market that is.

“He does believe in the quality of information, but states you can’t trust news headlines, analysts or company managers. “You must do your own research,” he says – agreed.

The bottom line for Van Dam, with the Million Dollar Traders program though, is not to encourage trading at all. “Actually a lot of people who are trading shouldn’t be trading. This is not a PR exercise for the industry.”

Gold may face selling pressure in the short term as price meets overhead resistance. Also there are a couple of contrarian indicators which I spotted in this month’s issue of these popular magazines.  Purely on balance of probabilities lightening positions, so as to add a second LOIL in the SIPP.

Trades on: Robusta Mar 09 buy 1/5 at 1,591 this week.

This article suggests a contrarian approach versus Goldstock Newsletters Bullish consensus.

I will apply these tools this year and note here the findings.

2009 soft commodities trades. That Soybean trade was profitable, though did not open the trade signalled by the ema. Now facing resistance at upper line, may be still worth a trade.

Sugar, looks good above trendline and will coincide with ema breakout.

Short Cocoa below trendline, long above upper line.

Robusta in doldrums after good crop. Likely will go higher with rest of soft commodities. $DJASO, group chart has broken trendline nicely to upside, does not look like it will breach $40, as support for all of above trades.