Traders Toolbox: Reversals Revisited

Trader's Toolbox

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Image Reactions Within A Downtrend

"Reversals In my opinion, one of the most misused and abused terms in technical analysis is the reversal or key reversal. I often get calls from both new and experienced traders who are excited about a market because it has just posted a “key reversal.” While the action these traders point to often marks a reversal day, such a day (week or month) by itself actually has little significance. There is research which indicates single period reversals mark a turn only about 50% of the time. Which gives about the same odds of indicating a turn using a coin flip..."

Revisit the Trader's Toolbox Post: "Reversals" here.

Looking back on gold...

Adam has created countless trading videos throughout the years. One in specific was recorded in February of 2010 regarding cycles in the future price of gold. Let us refresh your memory…click here.

Now that you have the back story and the video to prove it, let us share with you an article that was published by The Street yesterday afternoon:

Over the course of the past few months, one large buyer has accumulated approximately 50,000 gold call option contracts -- most of the calls are strikes between $1,600 and $1,800 an ounce and for expirations between August and December. In total, as much as $50 million in call premium has been paid out by the purchaser.

As the gold futures market is roughly 10x to 15x the size of the gold options market, this is a huge bet in absolute dollars relative to the liquidity of the market.

Considering that the calls are well out-of-the-money (gold, on a futures basis, today trades at $1,512), the call option is all premium and, as such, is a decaying asset. So, given the size of the purchase, the buyer is not likely an individual hedge fund -- more likely, it is a central bank or a sovereign fund.

It is interesting to note that all of the buyer's options mature after QE2, so the buyer might believe, for example, that the institution of QE3 holds a greater probability to be implemented than the consensus is currently forecasting.

The buyer is clearly betting on a large run-up in the price of gold during the summer and fall months.

With all this leverage in the hands of one owner, a sharp price appreciation in the price of gold could cause the shorts (on the other side of the call option trade) to continuously buy futures and further contribute to a rising gold price in order to maintain a flat delta. –

We read this article, and thought to ourselves, “Why does this prediction look so familiar?” Then we remembered…


We hope that you listened to our “Trade Triangles” and got your piece of the fifty-million dollar pie. If you’ve been wondering what MarketClub can do for you…now you know!

The MarketClub Team

Trader's Toolbox: Support and Resistance Revisited

Although many of you will find this lesson in one of the most basic concepts of market behavior "old hat", it never hurts to review. One of the first things a new trader is told (I hesitate to say learns as many never do) is to buy a breakout above resistance and sell a fall through support.

Resistance is the level which holds a market down, while support is an area which props up a market much like a ceiling and a floor. The key is to identify the critical levels. There are a number of methods to determine support and resistance: trendlines, moving averages, retracements, Gann angles, etc. However, simple observation can be an effective means of locating the important areas. A quick glance at the October cotton chart reveals the most basic levels of support and resistance (broken lines).

A previous high often provides resistance, while an earlier low tends to offer support. Support or resistance levels are not necessarily flat. For example, trendlines reveal areas of rising support or falling resistance. Also, when broken, uptrend lines offer a new level of rising resistance, while the opposite is true for downtrend lines. In fact, virtually any broken area of support will become resistance and vice versa. After breaking a level of support (or resistance), the market commonly comes back to test that level before resuming the downmove (upmove). This may be the single most effective method of locating low-risk entry points for trading purposes. This lesson may seem like wasted space to the experienced. However, it is amazing how often traders simply forget (or ignore) the power of basic support and resistance levels. This concept can be very profitable, but it may be just too "easy".

1PM Market Update for 5/24/11

Hi, Adam Hewison here for MarketClub. Did you miss your 1 p.m. market update for Tuesday the 24th of May? Catch up now!

Here's what's happening right now in the major markets ...

S&P 500: -60. Only the longer-term monthly Trade Triangle remains intact at this time. Short-term market trend is down. Market at the lower end of the Donchian Channel. Neutral - Major Support at 1,295-1,300.Would not be surprised to see a possible bounce.

Silver: Score +55. Today's action favors more of a recovery on the upside. Spot market moved over 36.00. Bullish divergence on the Williams %R indicator confirmed. Near term support at 34.25. Major Support at $32.00. Major resistance at $39.50. Short-term rally potential up to 42.00.

Gold: Score +70. Longer term trend remains positive. The $1,520 was broken today and a close over this area indicates more upside action. Support at $1,500, $1,475 and $1,462.50. Market Trending higher.$1,533 is a 62% Fib retracement.

Crude Oil: +80 Trading range. Long term indicator remains positive. Resistance at 100.80 basis July. Choppy market. Bullish divergence confirmed on the Williams %R indicator.A close over $100 basis July is needed to drive prices higher.

The Dollar Index: Score +60. In a very broad trading range with the longer term Trade Triangle remaining in a negative position. Index reversed from resistance at the 76.50 level. Major resistance remains at 77.50. Minor support at 75.00. Possible "Dark Cloud Cover" forming today and a Negative divergence on the Williams%R indicator.

The Thomson Reuters/Jefferies CRB Commodity Index: Score +55. Near-term resistance at 344.00. Minor support at 335.00. Market oversold. Bullish divergence building on the Williams %R indicator. Trade Triangles are negative on this market.

Join me again tomorrow at 1:00p.m. ET for your LIVE and actionable update!

All the best,

Adam Hewison
President of
Co-founder of MarketClub