Markets I Trade: January 8, 2019

In my non-registered investment account I am developing my trend following strategy continuously. I don't pretend to have all the answers; I am always exploring and learning and I am sharing that journey with you on this blog.

All I know for sure is that I want every trade to end in three ways: a small loss, a small gain, or a large gain. I predetermine my risk on each trade and aim to make sure that risk is never exceeded.

A big focus of my trading is to expand my access to a broad range of markets while using my investment capital very efficiently. Instead of holding standard positions in ETFs or stocks, I am using LEAPS options and futures contracts.

Options and futures contracts allow me to bet on the upside or on the downside of trends with minimal penalties. They also require a small capital allocation to control a large position. Unlike with common stock or ETFs, options and futures do not require borrowing costs to short an asset.

I try to limit my investing process to liquid markets that have the highest potential for bigger price movements. This generally means using LEAPS options on the largest ETFs and using futures contracts for commodities and currencies.

Thanks to the wide range of choices in the ETF markets and the massive breadth of the futures markets, I can theoretically get easy exposure to hundreds of different assets across the planet.

To monitor each instrument I trade, I look at moving averages and volatility measurements. Although there is no holy grail indicator, looking at these tools can help paint a pretty solid picture of where the markets are going. This can improve the odds of success in trading.

Moving averages help identify the direction of trends and can help show turning points in direction. Using volatility measures makes it easy to size each position based on pre-determined exit points. High volatility markets translate to smaller positions while low volatility markets allow for larger positions.

I also look at breakouts, although I am not using them to enter or exit positions. Breakouts can be very helpful in confirming trends and seeing points of previous resistance.

Silver (SI=F)

In today's post I will share my analysis on my latest large trade in silver. I used futures contracts in this trade as the LEAPS options market on the silver ETF (SLV) is pretty thin. A single futures contract for silver gives exposure to 5,000 ounces for delivery at a future date. Most contracts are settled financially rather than being physically delivered.

I have been watching precious metals quite closely for the past year looking for an entry point. In the late summer, gold prices seem to have made a bottom which later set up my entry for the options trade on GLD.

Gold and silver often trade in tandem, but throughout the late summer and fall, silver prices kept falling while gold prices inched upwards. In late November, it required more than 86 ounces of silver to buy a single ounce of gold. That's one of the highest ratios in several decades.

Silver appears to have made an interim bottom in November and has shown strong upside movement since then. Since my entry point, my silver trade has done very well. It has jumped about $0.85 per ounce from my purchase price and I am holding exposure to 10,000 ounces.

Silver (Weekly Bar)

Source: StockCharts.com

In the beginning of September 2018, silver was oversold on a technical indicator and had a bounce up from that low point around $14.00 per ounce to about $14.90 per ounce.

Prices quickly turned down and dropped below $14.00 per ounce in early November 2018—once again touching an oversold metric. This time, selling volumes were high but buying volumes were lower on the upside than the previous move in September-October 2018.

Silver has shot up from my entry point a bit over $14.80 per ounce and volume is still pretty subdued.

Upside Optimism

  • An interim higher high was made when silver jumped over $14.90 price level in September-October.
  • Silver moved from a technical oversold period which can indicate a longer term bottom due to seller exhaustion.
  • The price moved strongly above the 10-week SMA.
  • At the end of December, the price soared up and closed above the 40-week SMA for the first time since early 2018.

Upside Caution

  • The 40-week SMA is still declining at the moment, indicating a long-term downtrend.
  • Betting on a pivot point (change in direction against the long-term trend) always has more risk than buying into a confirmed uptrend.
  • If the price continues to expand aggressively, silver could quickly become technically overbought and that would signal a good probability of a price pullback.
  • The range from $16 to $18 per ounce could see a lot of selling pressure.

Although I don't trade based on stories, silver prices have been depressed for nearly seven years. It costs more than $15 per ounce for major miners to produce silver. I don't believe prices could fall much lower than they are.

SI=F (Daily Bar)

Source: StockCharts.com

This chart shows my entry point (blue) and my current stop level (red). The price has pulled away strongly from my stop, so I will carefully monitor my risk on this trade to prevent over-exposure.

I entered this trade using silver futures contracts on the COMEX exchange for March 2019 delivery. The margin (or deposit) per contract is just US$3,600 plus any applicable paper losses.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.

Markets I Trade: December 11, 2018

In my non-registered investment account I am developing my trend following strategy continuously. I don't pretend to have all the answers; I am always exploring and learning and I am sharing that journey with you on this blog.

All I know for sure is that I want every trade to end in three ways: a small loss, a small gain, or a large gain. I predetermine my risk on each trade and aim to make sure that risk is never exceeded.

Due to account size, my brokerage, my location, and my experience, I am somewhat limited in what I can effectively trade at this time given my risk tolerance. I recently have done a lot of self education on options and have begun to use LEAPS options in my strategy.

I try to limit my investing process to the most liquid markets that have the highest potential for bigger price movements. This generally means ETFs, certain leveraged ETFs, the USD/CAD currency pair, and certain emerging market currencies against the Canadian dollar or U.S. dollar.

Thankfully this covers a large portion of the investable market. ETFs track many different markets and also can provide exposure to currency movements (unhedged country ETFs).

With long call options and long put options, I can very effectively access markets with a relatively high degree of leverage and great risk management. I use only LEAPS options—options that expire more than one year from the entry point.

To monitor each instrument I trade, I look at moving averages and volatility measurements. Although there is no holy grail indicator, looking at these tools can help paint a pretty solid picture of where the markets are going.

Moving averages help identify the direction of trends and can help show turning points in direction. Using volatility measures makes it easy to size each position based on pre-determined exit points. High volatility markets translate to smaller positions while low volatility markets allow for larger positions.

In a currency pair trade, I have found that moving average indicators can be quite effective as well. However, in using moving averages alone, the trader doesn't have the same embedded exit points to help determine position sizing.

This makes moving averages most effective for trading my two primary account currencies—the USD/CAD pair. I don't try position size the USD/CAD pair as I am equally happy with my account cash being 100 percent in the Canadian dollar or 100 percent in the U.S. dollar.

I also look at breakouts, although I am not using them to enter or exit positions. Breakouts can be very helpful in confirming trends and seeing points of previous resistance.

Brazil (EWZ)

Given the current market environment, I am holding very few positions at this time.

In today's post I will provide an update on my Brazil trade.

Back in early October, I took an upside position in Brazilian stocks. I talked about that position entry several weeks ago in the November 13 post.

Since my entry point, my Brazilian stock trade has done very well. It has jumped about 15 percent and, barring a massive gap over my stop-loss, this will be a profitable trade that exceeds my initial risk.

EWZ (Weekly Bar)

Source: Yahoo Finance

Since June 2018, where EWZ was technically oversold, and September 2018 where EWZ was in an interim bottom, we saw a quick jump up. However, EWZ seems to have stalled out at the moment and I am looking for new medium-term highs to be made.

That said, I still think EWZ has a decent technical picture. A move over $42 would solidify the upside and could be a decent entry point.

Upside Optimism

  • An interim higher high was made when EWZ jumped over $37.65 in early October.
  • At current levels, EWZ is not technically overbought and is sitting roughly in the middle of the optimism range.
  • Since early October, the price is holding on top of the 40-week SMA.
  • Volume seems to be generally higher on upwards moves, indicating desire to buy and hesitation to sell.

Upside Caution

  • The price has fallen slightly through the shorter term indication—the 10-week SMA.
  • Although it is flattening, the 40-week SMA is still declining at the moment.
  • The price is now effectively in a trading range of $37 to $42 over the past two months.

If EWZ continues to bounce up from its current price of $38.70, the $47 level will be a key point to look at. That is when the prior strong upwards move stalled in January 2018. If EWZ moves past that, it would signal strength in the upside.

Right now, EWZ would have to jump more than 20 percent to hit $47.

EWZ (Daily Bar)

Source: Yahoo Finance

Looking at the daily chart, we can clearly see the trading range that has formed over the past two months. Although it would clearly be nice to see repeated higher highs, even in the daily chart, the $37.50 level has held twice now.

This chart shows an update on my current stop level. My exit on this trade has moved up and is a little over $37. The stop has really tightened up to the price over the past few weeks and is now within 5 percent of the price.

I entered this trade using a liquid 3x leveraged ETF, trading as BRZU. If I had to do this trade again, I would consider using EWZ long-dated options as they are highly liquid and a more efficient use of capital.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.