Gold: Time To Load Up The Truck Again

As we look at the previous metals markets, I wanted to use the Variable Changing Price Momentum Indicator (VC PMI) to the markets and see what it's telling us for next week. In our past reports, we have been saying that in gold we see supply coming into the market or sellers in the $1,555 to $1,580 area. If we look at the market, the high was $1,566 on September 4, 2019. The VC PMI provides a structure for day and swing traders and acts as a GPS for your trading with 90% to 95% probabilities (see VC PMI Automated Algorithm section below).

Gold has built an area of resistance, where you can expect sellers to come into the market. If the supply is greater than demand, it will be reflected in the price. When gold closed below the sell 1 (S1) level at $1,565, it activated a short signal on September 4. The automated algorithm identified the targets below that level to allow you to manage your inventory as a self-directed trader for stocks, ETFs, futures, options, stock indices or whatever you are trading. The VC PMI can be based on daily, weekly, monthly or annual data for day, swing or position traders. Here, we primarily use the weekly data and indicator, as well as sometimes publish information based on the monthly data.

Gold: Sentiment is Neutral to Bearish

After the supply came in, it brought the market below the average price as we come into next week. The average price for next week is $1,527. The price closing below that level means we are coming into next week with a bearish sentiment. The market activated the buy 1 (B1) level of $1,494 and the buy 2 (B2) level of $1,473. B1 means a 90% probability that, if activated, the market will revert from that level to the mean of $1,527. If the market reaches the B2 level, there is a 95% probability that the market will revert back up to the mean of $1,527. We use the 15-minute bar for day-trading purposes. The market needs to close below those levels to activate the triggers. Your protective level is a close below $1,494 using the close of the 15-minute bar. We do not recommend using straight stops.

The blue area in the chart shows the area of demand.

If the price as we come into next week closes above $1,527, it would activate a bullish trend momentum and the Sell 1 (S1) level of $1,548 to Sell 2 (S2) of $1,581.

Recap

As we come into next week, the price closing at $1,515 has activated a bearish trend momentum by closing below the average price of $1,527. The average price is also used as a protective level to identify when the sentiment of the market shifts. If it closes above $1,527, this bearish sentiment will shift to neutral. A second close above it, would activate a bullish sentiment, with S1 of $1,548 and S2 of $1,581 automatically activated. Conversely, if the price comes down to $1,494-1,473, it would activate a bullish setup, and look out for a buy trigger.

It appears that this major sell-off in gold and silver has eliminated a lot of stops underneath the market as it has cleaned the path all the way down to where we are, approaching the $1,500s level, which indicates a major area of support.

The VC PMI Automated Algorithm

We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets," "The Power of Mean Reversion in Factor- Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages and momentum indicators. The science of Vedic mathematics is used to combine these elements into a comprehensive, accurate and highly predictive trading system.

Mean reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it's between 90% (Sell 1 or Buy 1 level) and 95% (Sell 2 or Buy 2 level) probable that prices will revert to the mean by the end of the trading session. I use this system to analyze the gold and silver markets.

Strengths And Weaknesses

The main strength of the VC PMI is the ability to identify a specific structure which price level traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level and the market closes above or below these extreme levels.

The day trading program then confirms that a higher fractal in price has been identified and the market will move significantly higher, although the same principle applies if the market falls significantly. The price closing above the S2 level indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.

The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly and monthly.

The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly or monthly average.

To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check out our Marketplace service, Mean Reversion Trading.

Disclosure: I am long NUGT.

To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check us out on  more

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