Three Charts Every Trader and Investor Must See

Understanding the stock market and its potential through the use of technical analysis and historical price events has been proven repeatedly to outperform all forms of fundamental trading styles. The following is a story that walks you through my experience, the shift in my mindset and how I came to the conclusion that the three charts I share in this article are critical to your understanding of to make money in today’s market!

When I first learned to trade, I got all caught up with researching companies and finding the ones with the best earnings and future growth. I did that for several years after studying and following many “professional traders” who said it was the best way to trade and invest long term. We lost our shirts during the 2000 bear market by continuing to trade on fundamentals as stocks fell in value week after week. Even the companies that showed quarterly earnings growth fell in value – none of it seemed to make any sense to me, and it was very frustrating.

Losing money when buying the best companies made no logical sense, making me step back from the markets and ask myself, ‘what am I doing wrong here‘. People today are asking themselves the same question given today’s dizzying markets:

· Telsa shares fell from $971 a share down to $347, whopping 63% drop, in only a few weeks and then rebounded again too xx

· Netflix is down 30%, even though people are stuck at home desperately trying to find things to watch)

· Amazon has fallen 26% in the past couple of weeks despite soaring demand for their delivery services

· GDXJ, the gold miners sector that is typically a safe haven during times of volatility, crashed 57% even though gold is usually a safe haven during times of volatility.

So, what was I doing wrong? I started calling and visiting traders who were making money during the bear market to see what they were doing, and 100% of them were doing the same thing – Trading with Technical Analysis. I wasn’t doing anything wrong, per se. I was simply using the wrong tools and analysis for success!

What is Technical Analysis? In short, it’s the study of price, time, and volatility of any asset using price charts and indicators. Traders use technical analysis to find cycles and patterns in the market and trade on the analysis of preferred indicators as opposed to the fundamentals of a company and/or the economy in general.

When you start studying technical traders, you will notice every trader has a particular time frame, a preferred set of indicators, and trading frequency that fits their unique personality and lifestyle. Their brains can see the charts in ways you and I may not see them to predict future price direction over the next few hours, days, weeks, or months ahead. I quickly learned there are infinite ways to trade using technical analysis.

I was very surprised by how much these pro traders allowed me. While standing over their shoulders, I was looking at their charts to try to divine their high-level strategies and learn how they think, analyze, and trade. It was amazing how different each of them traded the market. Some traded currencies; others traded stocks, indexes, options, futures, etc. Most were day traders, swing traders, or a mix of the two. But none of them gave me their secret sauce. That is why I turned 100% of my focus to technical analysis. I was excited at the prospect of being able to profit from both rising and falling prices and no concern for anything other than price action reduced my research time dramatically. It was and is the biggest AH-HA moment of my life and a turning point for my career as a trader.

The year was 2001, when I made the shift to technical analysis. I unsubscribed from everything fundamental based. I canceled my CNBC, stopped listening to news, and stopped reading other people’s reports altogether. My goal was to create my own technical trading strategy that best suited my personality and lifestyle. I would have to discover the securities I was most comfortable trading, the frequency I would trade, and the type and amount of risk I was prepared to take.

I traded options, covered-calls, currencies, stocks, ETFs, and futures. From day trading to position trading (holding several months), I tried it all, hoping something would click for me to pursue at a much deeper level. Day trading, momentum, and swing trading were my sweet spots. Having three of them was a bonus as I know some traders only ever master one in their lifetime if they are lucky. I grew a liking for trading the major indexes like the DJIA, S&P 500, and Nasdaq… great liquidity with big money always at play.

Along my journey, I realized that if I could predict the overall market trend direction for the day or week, then I could day trade small cap stocks in the same direction as the index, knowing 80+% of the stocks follow the general stock market trend. I could generate much larger gains in a very short period of time. As time went on, I became comfortable predicting, trading, and profiting from the indexes, and my new trading strategy began to emerge.

I was fortunate enough to start learning about the markets and trading in college with a $2,000 E-Trade account, and then retiring (kinda) in 2009 at the age of 28. I built my dream home on the water, bought cars and boats, and spent time traveling with my growing family. I love trading and sharing my analysis with others – it is better than I had ever imagined and why I continue to help thousands of traders around the world every day with these video courses Trading System Mastery, and Trading As Your Business.

I contribute 100% of my trading success and lifestyle to the fact that I embraced technical analysis, where my strategy involves nothing more than price movement, position-sizing, and trade risk management techniques. All these allow me to easily reduce exposure, drawdowns, and losses with proper position sizing and protective strategies. If you want quick and simple, read about my journey and core trading tools in my book Technical Trading Mastery – 7 Steps to Win with Logic. My strategy is represented by human psychology and historical trading, as expressed in the three charts below.

Chart 1 – Human Psychology is What Drives Price Action

This chart is my favorite as it explains trader and investor psychology at various market stages. It also includes a simplified market cycle in the upper right corner, letting you know where the maximum financial risk is for investors and the highest opportunity for a trade.

Chart 2 – 2000 Stock Market Top & Bear Market That Followed

The chart may look a little overwhelming, but look at each part and compare it to the market psychology chart above. What happened in 2000 is what I feel is happening this year with the stock market sell-off.

In 2000, all market participants learned of at the same time was that there were no earnings coming from their darling .com stocks. Knowing they were not going to make money for a long time, everyone started selling these terrible stocks, and the market collapsed 40% very quickly.

What is similar between 2000 and 2020? Simple really. COVID-19 virus has halted a huge portion of business activity, travel, purchases, sporting events, etc. Everyone knows earnings are going to be poor, and many companies are going to go bankrupt. It is blatantly clear to everyone this is bad and will be for at least 6-12 months in corporate earnings; therefore, everyone is in a rush to sell their stock shares and are in a panic to unload them before everyone does.

Chart 3 – The 2020 Stock Market Top Looks to Be Unfolding

As you can see, this chart below of this year’s market crash is VERY similar to that of 2000 thus far, it’s based on a similar mindset, which is the fear of losing money, which causes everyone to sell their positions.

I am hopeful that we get a 25-30% rally from these lows before the market starts to fall and continue the new bear market, which I believe we are entering. Only the price will confirm the direction and major trend to follow, and since we follow price action and do not pick tops or bottoms, all we have to do is watch, learn, and trade when price favors new low risk, high reward trade setups.

It does not matter which way the market crashes from here, we will either profit from the next leg down, or will miss/avoid it depending on if we get a tradable setup. Either cause is a win, just one makes money, while the worst case scenario just preserves capital in a cash position, you can’t complain either way if you ask me.

Before you continue, be sure to opt-in to our free market trend signals before closing this page, so you don’t miss our next special report!

Concluding Thoughts

In short, is if you lost money during the recent market crash, then you likely have not mastered a technical trading strategy and do not have proper trade management rules in place. All traders must manage risk and trades to be sure you lock in profits and limit losses when prices start pullback or collapse. Without either of these, you will not be able to achieve long term success/gains, and that’s a fact.

While we can all make money during a bull market when stocks are rising, if you cannot retain or grow your account during market downturns, then you may as well be a passive buy and hold investors. You are better at riding the emotional investor rollercoaster without wasting your time and effort as a trader if you are not going to spend the time and money to learn to follow someone to become a successful trader. Without proven trading strategies or someone to follow, you are more likely to underperform a long term passive investor.

I get dozens of emails from people every week trying to trade this wild stock market and use leveraged ETFs, which doing so during these unprecedented market conditions is absolute craziness if you ask me.

These people think that because there are big moves in the market, they should be trading. That big money should be made trading them, which drives me crazy because it could not be further from the truth unless you are a scalp or day trader. To me, in this market condition, it’s about preserving capital, not risking it, in my opinion.

A subscriber to my market video analysis and ETF trading newsletter said it perfectly:

“Always intrigues me how many amateur surfers get to the north shore beaches in Hawaii, take one look at monster waves and conclude it’s way too dangerous. Yet the amateur trader looks at treacherous markets like these and wants to dive right in!!” Richard P.

I have to toot my own horn here a little because subscribers and I had our trading accounts close at a new high watermark for our accounts. We not only exited the equities market as it started to roll over we profited from the sell off in a very controlled way.

I hope you found this informative, and if you would like to get a pre-market video every day before the opening bell, along with my trade alerts, visit my ETF swing trading visit my website at The Technical Traders.

Chris Vermeulen
Founder of The Technical Traders 

Revisiting Black Monday 1987

Back in the day, for those of you that are old enough to remember and have experienced one of the most incredible trader psychology driven stock market decline in recent history. The difference between “Black Monday” and most of the other recent stock market declines is that October 19, 1987, was driven by a true psychological panic, what we consider true price exploration, after an incredible price rally.

It is different than the DOT COM (2001) decline and vastly different than the Credit Market Crisis (2008-09) because both of those events were related to true fundamental and technical evaluations. In both of those instances, prices have been rising for quite some time, but the underlying fundamentals of the economics of the markets collapsed and the markets collapsed with future expectations. Before we get too deep, be sure to opt-in to our free market trend signals newsletter.

Our researchers believe the setup prior to the Black Monday collapse is strangely similar to the current setup across the global markets. In 1982, Ronald Reagan was elected into his second term as the US President. Since his election in 1980, the US stock market has risen over 300% by August 1987.

Reagan, much like President Trump, was elected after a long period of U.S. economic malaise and ushered in an economic boom cycle that really began to accelerate near August 1983 – near the end of his first term. The expansion from the lows of 1982, near 102.20, to the highs of 1987, near 337.90, in the S&P 500 prompted an incredible rally in the US markets for all global investors.

This is very similar to what has happened since 2015/16 in the markets and particularly after the November 2016 elections when the S&P500 bottomed near 1807.5 and has recently set hew highs near 3026.20 – a 67.4% price rally in just over 3 years.

One can simply make the assumption that global investors poured capital in the US markets in 1983 to 1986 as the US markets entered a rally mode just like we suspect global investors have poured capital into the US markets after the 2016 US elections and have continued to seek value, safety, and returns in the US markets since. These incredible price rallies setup a very real potential for “true price exploration” when investors suddenly realize valuations may be out of control.

So, what actually happened on October 19th, 1987 that was different than the last few market collapse events and why is it so similar to what is happening today?

On October 19, 1987, a different set of circumstances took place. This was almost a perfect storm of sorts for the markets. The US markets had risen nearly 44% by August 1987 from the previous yearly close – a huge rally had taken place. Computer trading, which some people suspected may have been a reason for the price decline on October 19, was largely in its infancy.

Floor traders were running the show in New York and Chicago. The London markets closed early the Friday, October 16, because of a weather event that was taking place. The “setup” of these events may have played a roll in the liquidity issues that became evident on Black Monday and pushed the US markets down 22.61% by the end of trading.

The US markets had set up a top near 2,722 in early August 1987 after rising nearly 44% from the 1986 end of year closing price level of 1,895. The SPX rotated lower from this peak to set up a sideways price channel near 315 throughout the end of August and through most of September. On October 5, 1987, the SPX started a downward price move that attempted to test the lower support channel near 312. On October 12, one week later, the SPX broke below this support channel and closed at 298.10 (below the psychological 300 level). The very next weekend was October 17 & 18 – the weekend before Black Monday.

Sunday night, October 18, in the US, the Asian markets opened for trading and a price sell-off began taking place in Hong Kong. Because the London markets has closed early on the 16th due to the storm, by the time they opened the UK markets began tanking almost immediately. Early in the day on Monday, October 19, the FTSE100 had collapsed over 136 points.

Our researchers believe the declines in the US markets in early October 1987 set up a breakdown event that, once support was broken, prompted a collapse event where liquidity issues accelerated the price decline volatility – much like the “flash crash”. Global investors were unprepared for the scale and scope of the price decline event and panicked at the speed of the price collapse.

In fact, at the height of the 1987 crash, systemic problems (mostly solvency and brokerage house operations) continued to threaten a much larger financial market collapse. Within days of Black Monday, it became evident that margin accounts and solvency issues related to operating capital, large scale risks and continued fear that the markets may continue to collapse presented a very real problem for the US and for the world. Have we re-entered another Black Monday type of setup across the global markets?

As new economic data continues to suggest the global markets are economically contracting and stagnating, the US Federal Reserve has started buying assets again while the foreign central banks continue to push negative interest rates while attempting to spark any signs of real economic growth. The US stock market has continued to push higher – almost attempting new all-time highs again just recently. The US stock market is up nearly 68% over the past 3.5 years since Trump was elected and as of Friday, October 18, 2019, the US stock markets fell nearly 0.75% on economic fears.

In Part II of this article, we’ll explore the potential of another Black Monday type of setup that may be playing out before our very eyes right now in the US stock market.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short term swing trading and long-term investment capital. The opportunities are massive/life changing if handled properly.

I urge you visit my ETF Wealth Building Newsletter and if you like what I offer, join me with the 1-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next financial crisis.

Join Today to Get a Free 1 ounce Silver Bar with a subscription – Offer Ends This Week!

Chris Vermeulen
The Technical Traders

How Close are the Markets from Topping?

Now that most of the U.S. Major Indexes have breached new all time price highs, which we called over 5+ months ago, and many traders are starting to become concerned about how and where the markets may find resistance or begin to top, we are going to try to paint a very clear picture of the upside potential for the markets and why we believe volatility and price rotation may become a very big concern over the next few months. Our objective is to try to help you stay informed of pending market rotation and to alert you that we may be nearing a period within the US markets where increased volatility is very likely.

Longer term, many years into the future, our predictive modeling systems are suggesting this upside price swing is far from over. Our models suggest that price rotation will become a major factor over the next 12 to 15+ months – headed into the U.S. Presidential election cycle of November 2020. Our models are suggesting that the second half of this year could present an incredible opportunity for skilled investors as price volatility/rotation provide bigger price swings. Additionally, our models suggest that early 2020 will provide even more opportunity for skilled traders who are able to understand the true price structure of the markets. Get ready, thing are about to get really interesting and if you are not following our research or a member of our services, you might want to think about joining soon.

We are focusing this research post on the NQ, ES and YM futures charts (Daily). We will include a longer term YM chart near the end to highlight longer-term expectations. Let’s start with the NQ Daily chart.

The NQ Daily chart, below, highlights our ongoing research, shows the 2018 deep price rotational low and the incredible rally to new all time highs recently. The most important aspect of this chart is the “Upside Target Zone” near the $8040 level and the fact that any rally to near these levels would represent an extended upside price rally near the upper range of the YELLOW price channel lines. We believe any immediate price rotation may end near the $7500 level (between the two Fibonacci Target levels near $7400 & $7600) and could represent a pretty big increase in price volatility.

This ES Daily chart highlights the different in capabilities between the NQ and the ES. While the NQ is already pushing into fairly stronger new price highs, the ES is struggling to get above the Sept/Oct 2018 highs and this is because very strong resistance is found between $2,872 and $2,928. It is very likely that the price volatility will increase near these highs as price becomes more active in an attempt to break through this resistance. It is also very likely that a downside price rotation may happen where price attempts to retest the $2,835 level (or lower) before finally pushing into a bigger upside price trend. The Upside Target Zone highs are just below $3,000. Therefore, we believe any move above $2,960 could represent an exhaustion top type of price formation.

This YM chart is set up very similarly to the ES chart. Historical price highs are acting as a very strong price ceiling. While the NQ is already pushing into fairly stronger new price highs, the YM continues to struggle to get above the Sept/Oct 2018 highs and this is because very strong resistance is found between 25,750 and 27,000. Please take notice of the very narrow resistance channel (BOX) on this chart that highlights where we believe true price support/resistance is located. We believe it is likely that a downside price rotation may happen where price attempts to retest the $26,000 level (or lower) before finally pushing into a bigger upside price trend.

As you can tell from our recent posts and this research, we believe price volatility is about to skyrocket higher as price rotates downward. Our predictive modeling systems are suggesting that we are nearing the end of this current upside move where a downward price move will establish a new price base and allow price to, eventually, push much higher – well above current all-time high levels.

We’ve issued research posts regarding Presidential election cycles and how, generally, stock market prices decline 6 to 24 months before any US Presidential election. We believe this pattern will continue this year and we are warning our followers to be prepared at this stage of the game. No, it will not be a massive market crash like 2008-09. It will be a downside price rotation that will present incredible opportunities for skilled traders. If you want more of our specialized insight and analysis, then please visit The Technical Traders to learn how we help our members find success.

Lastly, we’ve included this Weekly YM chart to show you just how volatile the markets are right now. Pay very close attention to the Fibonacci Target Levels that are being drawn on this chart. The downside target levels range from $16,000 to $21,060. The upside target levels range from $30,000 to $32,435. Top to bottom, The Fibonacci price modeling system is suggesting a total volatility range of over $16,000 for the YM Weekly chart and this usually suggests we are about to enter a period of bigger price rotation and much higher price volatility.

Right now, we suggest that you review some of our most recent posts to see how we’ve been calling these market moves, visit The Technical Traders Free Research. It is important for all of our followers to understand the risks of being complacent right now. The markets are about to enter a period of about 24+ months where incredible opportunities will become evident for skilled traders. If you know what is going to happen, you can find opportunities everywhere. If not, you are going to be on the wrong side of some very big moves.

Chris Vermeulen

How To Consistently Make Money Day/Swing Trading

This has been the best week in a long time for intraday trades. The last 4 days the SP500 gave us 8 trades and all 8 turned into winners. Each days turning generating between $300 a $1250 per ES mini contract, although these can be traded using the SPY or 3X index ETFs.

Subscribers who day trade are taking this pre-market analysis and setups and making a weeks wage within 1 – 3 hours in the morning before lunch.

What makes these trade triggers is that they are the BROAD market SP500 so if you day trade other stocks knowing the short term market direction each morning add so much power to your other day trades for timing entries and exits.

SPY ETF 10 MINUTE CHART

This chart focuses on today’s spike higher and gap lower. both these played out once again and are based strictly on technical analysis and statistical analysis.

If you want to be notified of these types of trades each week 

subscribe to our Wealth Building Trading Newsletter Today!

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Today's Gap Fill and Prediction Complete, What's Next?

Subscribers of our Technical Traders Wealth Building Newsletter were told before the market opened that stocks were set to gap higher and then fill the price gap. Only 12 minutes after the market opened the gap window was filled for a 9.5 pt move in the SP500, which is a quick $475 profit for those trading futures, or $103 profit per 100 shares traded of the SPY ETF.

Yesterdays Gap Fill Forecast

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Positioning for “Swan Type” Disasters

Recently, the US, China and portions of SE Asia have been hit by massive hurricanes and cyclones. As investors, it is often difficult to understand the mechanics of how these types of disasters result in opportunities while thousands are attempting to rebuild and survive. Yet, as investors, it is our job to prepare for these outcomes and attempt to foresee risk and opportunities.

Over the weekend, we expecting Hurricane Irma to hit Florida and most of the South US, one should be asking the question, “How will this drive the markets over the next few weeks/months?” Let’s explore this question with some hard data and analysis.

US Population Density

The population in the South Eastern US is rather dense. There are also a number of key economic locations that could be disrupted if the storms starts to drift eastward.

Economic Output by Region

Consider that the South Eastern US represents a minimum of 1.6~2.2% annual GDP output.

When one considers the amount of destruction, disruption and economic decline that could be the immediate result of disasters such as hurricanes, one has to think about how the global markets will react to this level and type of event?

In comparison to the other geographic regions of the US, the South Eastern portion of the US still represents a substantially large portion of annual economic output/activity.

A massive disruption as well as asset revaluation event could cause a “blip” in the US GDP representing at least 2~3 tenths of a percent and could result in hundreds of billions in actual losses, economic output losses and infrastructure destruction.

Because of this, and other potential future events, we are concerned that the US markets may be headed for a correction event or bear market event in the near future. In the past, we have attempted to illustrate this potential by highlighting cycle events, key market breakouts and trends and, most recently, highlighted the 3-7-10 year cycle structures that play out in all markets. Now, we are setting up for an event that may unfold over the next 30~90 days as a “swan type event” that few are preparing for.

The US Dollar continues to slide. Our analysis showed that $92 was key support. Recently this level has been broken and we are concerned that the US Dollar may continue to slide lower. Overall, in terms of global competition, this may not be a tremendous hit. But in terms of purchasing power and the existing dominance of the US Dollar for trade, we could see some pressure in other areas.

In relation, our custom China/SE Asia Index is pushing toward the upward range of our price channel and could rotate lower on a Swan-type event (like a debt issue or political issue).

Oil is breaking downward as these global events and the transition to slower consumption continues to drive supply higher and higher. We could continue to see Oil based “Mini Swan Events” in countries that are dependent on Oil prices and income to support their economies.

US Banking and Insurance firms are sure to take increased risks with these types of events. As borrowers are displaced because of a “Swan type Event” and refocus on immediate needs/issues, delinquencies in mortgages, auto loans, credit cards and others will spike (quickly). This becomes a matter of survival (much like after the 2009 Credit Market Crisis) where people made choices to support immediate needs and not long term credit needs.

Metals, of course, have already started to make a move higher because of the risk of these events and global risks. Although, we still believe a short-term move lower (almost like a relief move) will play out over the next few weeks that will be the opportunity we have been waiting for. This move will allow investors to position metals trades for the potential longer term Swan event outcomes.

Lastly, our US Custom Index is continuing to provide a much clearer and defined picture of the Head-n-Shoulders formation that has us fixated on the potential of our VIX Spike dates, major cycle events, key rotations and, now, these potentially massive “Swan type events” to correlate into almost a Super-Swan Event. These hurricanes are passing events – they go away eventually. An economic event is something that takes much longer to resolve and restore. Much like the 2009 Credit Market Crisis, the results of a Swan type event can be long lasting and can result in massive asset revaluation.

We’re not saying the global markets are going to fall into another 2009 type event, but we are saying that our analysis is showing that “some type of event is setting up and IF it turned into a Super Swan event, then YOU (the investor) need to be aware of this potential”. If it simply turns into a correction or minor downturn, then you still need to be aware of this potential so you can profit from it – either way.

What will it take to setup and execute a series of trades that help protect against this type of possible Swan Event?

Join Active Trading Partners [visit here] today to learn more and follow our daily research reports to assist you in preparing for just this type of event. There is not a lot of time left before these potential events begin to play out. ATP will assist you by finding great trading opportunities and keeping you informed of the markets setups and potential moves/cycles.

Are you ready for the next Super-Swan Event? If not, join Active Trading Partners today.

Do These Three Things to Profit When Stocks Fall

By Jeff Clark, editor, Delta Report

The stock market has entered “the worst six months of the year.” The S&P 500 makes its best gains between November 1 and April 30. The period between May 1 and October 31 tends to be negative. The exact historical figures vary depending on who you ask. But there’s a good reason the Wall Street cliché machine advises to “sell in May and go away.” Stocks don’t do very well this time of year. And most of the major stock market disruptions of my lifetime occurred during this six month window.

Smart investors should take some time off. Enjoy the fruits of the “Trump rally.” Cash in your 13% gain on the S&P 500 since last Halloween and enjoy the summer. We’ll see you back in the action in time for Thanksgiving. But, if you want to make some money while the rest of the world is losing it, then stick around. Smarter investors could have the best six months ever.

Think about this for a moment…
Over the past 20 years, the Volatility Index (VIX)—a measure of the price investors are willing to pay to insure their portfolios against a significant market decline—has traded between a low of about 10 to a high of about 80. Recently, the VIX closed at 11—one of the lowest readings in the past 20 years. This happened at a time when the S&P 500 closed near an all time high. So with the broad stock market trading at its highest level ever, insurance is about as cheap as it has been in the past 20 years.

In other words, as we enter the worst six months of the year, put options—bets that the stock market will fall—are as cheap as they’ve been in two decades. This is a remarkable opportunity to profit as stock prices decline. Speculators can risk relatively small amounts of capital and achieve HUGE returns if stock prices fall. But there are a few tricks to profiting on the downside.

How to Profit as Stocks Fall
Over the long term, stocks go up. Don’t argue about it. That’s just how it is. The stock market moves higher over time. So short sellers—those folks who profit as stock prices fall—face an uphill battle.
Of course, there are situations where short sellers will ultimately profit even if the broad stock market moves higher.

For example, companies that commit fraud, take on insane amounts of leverage, or overhype a fad business almost always eventually crash and burn. But opportunities to short the stock in these firms are few and far between. For the most part, traders who are looking to short sell are going to trade on momentum. They’re going to look for overbought situations that look ready to reverse.

They’re going to buy cheap, out of the money put options. They’re going to be lightning fast, taking profits as the trade moves in their favor. And they’re not going to stress out about losing 100% on a trade because they kept their position size small enough to digest the loss.

How This Great Trade Went South
Let me tell you a story about the absolute best and worst put option trade I’ve ever seen. The trader made the most money I’ve ever seen on one put option trade, then he gave it all back. In September 1987, I was running the trading desk for a small regional brokerage firm. We had a handful of big name clients, folks who appeared regularly on the Financial News Network (the precursor to CNBC). One of these clients was a value oriented newsletter writer. His investment style was ultra-conservative and ultra-prudent.

So in September 1987, when this client bought a large number of put options on the S&P 100 (OEX), I took note. It was the first option position this client had ever purchased. He was buying these put options to hedge his managed-money portfolios against a sudden crash in the stock market.
It worked perfectly.

When the stock market crashed on October 19, 1987, the put options this client purchased rallied enough to completely offset the decline in his stock portfolios. It was, in my opinion, the most perfect hedge anyone executed prior to the crash. But it turned out to be a disaster for his accounts. You see, the money manager never sold the options.

Despite the market crashing, despite the VIX jumping above 100, despite the options he purchased trading for 20 times the amount he paid, he wanted to maintain the hedge. He wanted to keep his insurance in case stocks dropped even more.

They didn’t....When his options expired in November, even though the broad stock market was almost 25% lower than where it was when he bought the puts, his put options expired worthless. Stocks hadn’t rallied much off the October crash bottom. The S&P 500 was maybe 5% higher. The stocks this advisor held in his managed accounts were still suffering from the crash. And he never collected from the insurance he bought to protect his clients from the crash.

His clients suffered from the decline in the market, and they suffered from paying the option premium that was supposed to protect them from a crash. So what appeared to be a brilliant move in September 1987 turned out to be an expensive mistake by late November. His clients suffered from a decline in their stock holdings, and they also suffered as the OEX put options expired worthless.

A Simple Lesson
The lesson here is simple, when you’re betting on a broad stock market decline, you need to buy cheap put options AND you need to be willing to cash out of the trade when it moves in your direction—even if you think the move will go farther.
In my experience—which goes back more than three decades—if you want to profit on the short side of trading stocks, you need to get three things right…

1. You need to target stocks that are overextended to the upside and have negative divergence on the technical indicators.
   
2. You need to buy cheap put options, and you need to be willing to lose 100% of the premium you pay for the options. It should be less of a loss than short selling the stock.
   
3. You need to be willing to take profits quickly. As stocks fall, the implied volatility of the option premium increases. You don’t need to wait for the stock to achieve your downside target. The option premium will often inflate to reflect the downside potential. Be willing to sell into that.
   

Best regards and good trading,
Jeff Clark
Editor, Delta Report

Justin's note: Tomorrow, Jeff will be releasing a brand-new presentation on what he calls “the biggest breakthrough of my career.” In it, he’ll reveal a trading strategy that he’s been developing for over five years… has a success rate of 90.2%… average gains of 50%… and an average trade length of just two days.

E.B. Tucker, editor of The Casey Report, and Doug Casey have been talking all about it these past few months. They think it’s one of the most fascinating moneymaking ideas they’ve ever encountered.
Most people will be watching this presentation at 12 p.m. ET tomorrow… but as a Casey reader, E.B. will be sending you the video early, so you can start watching ahead of the crowd at 9 a.m.
We hope to see you there.

The article Do These Three Things to Profit When Stocks Fall was originally published at caseyresearch.com.

Why Corporate America Can’t Prop Up Stocks Much Longer

By Justin Spittler

Corporate America is bracing for tough times. Since you’re reading an investment newsletter, you likely own stocks. And if you’re like most investors, you keep up with how the companies you own are performing. You might even listen to quarterly “earnings calls,” which are when CEOs present results and give their outlook on the business.

Most of the time, CEOs act as cheerleaders on these calls. If business is bad, they’ll say business is good. If business is good, they’ll say it’s great. And CEOs are notoriously optimistic about the economy. After all, thousands of investors and analysts listen to these calls. CEOs know their stock can crash if they’re pessimistic about the business or economy. Because many CEOs will say anything to make their stock go up, we don’t put much stock in their words. We pay much more attention to their actions. And right now, large U.S. companies are acting like very tough economic times are ahead.

Business investment fell 2.2% last quarter..…
This metric measures how much companies spend on property, plant, and equipment. It was the third straight quarter that business investment fell. That hasn’t happened since the 2008-2009 financial crisis. We wouldn’t see this if the economy was headed in the right direction. Companies would be building more factories. They’d be buying more machinery. They’d be spending more money on research and development.

Instead, companies have cut back on investments. This tell us they don’t see many good opportunities. That’s a bad sign for the economy, yet stocks keep rallying. The S&P 500, Dow, and NASDAQ have all recently hit new record highs. At this point, you’re probably wondering what’s keeping stocks afloat if it’s not the economy.

Companies have spent about $2.5 trillion on “share buybacks” since the financial crisis..…
A buyback is when a company buys its own stock from shareholders. This can lift a company's stock price.
According to investment bank Goldman Sachs (GS), buybacks have been the biggest driver of U.S. stock performance since the financial crisis. Buybacks also reduce the number of shares that trade on the market.

This boosts a company’s earnings per share. But buybacks don’t make a company more profitable. They only make profits look bigger “on paper.” Companies have been buying up their own stock for two reasons: 1) They don’t see many growth opportunities. And 2) it’s incredibly cheap to borrow money.

The Federal Reserve has held its key interest rate near zero since 2008..…
The Fed cut rates to encourage households and businesses to borrow and spend more money. Mainstream economists thought this would “stimulate” the economy. It didn’t work. The U.S. economy has grown at an annualized rate of just 2.1% since 2009. This makes the current “recovery” the slowest by far since World War II.

The Fed did get folks to borrow huge sums of money. U.S. corporations have borrowed more than $10 billion in the bond market since 2007. Last year, they issued a record $1.5 trillion in bonds.
Buybacks are a big reason companies borrowed so much. MarketWatch reported last week:

Companies have been taking on piles of debt to finance buybacks, leading the total debt on the S&P 500 to grow 56% during the past five years.

According to Yahoo! Finance, companies in the S&P 500 funded 22% of last year’s buybacks with debt. This year, debt paid for 39% of share buybacks.

Corporate debt is now dangerously high..… 
According to Barron’s, corporate debt now equals 45.3% of gross domestic product (GDP). The only time this key ratio has ever been higher was in 2009, when it hit 45.4%. If the economy was doing well, this wouldn’t be such a big problem. Companies would be making enough money to pay their debts.

But right now, Corporate America is struggling to make money. Profits for companies in the S&P 500 are on track to fall for the fifth straight quarter. That hasn’t happened since the 2008-2009 financial crisis.
There’s no telling when this earnings drought will end either. According to research firm FactSet, analysts expect third quarter corporate profits to fall 1.7%. The third quarter ends on September 30.

Keep in mind, the U.S. economy is technically in a “recovery” right now. Imagine what will happen to corporate profits during the next recession. The more profits fall, the less money companies will have to prop up their shares with buybacks.
  
Companies have already started to cut back on buybacks..…
According to Business Insider, buybacks fell 18% last quarter. This sharp decline in buyback activity followed a near record breaking first quarter, in which companies in the S&P 500 spent an incredible $166 billion on buybacks. That’s the second most ever, and the most in one quarter since 2007. We don’t know exactly why companies are suddenly spending less on buybacks.

Maybe it’s because corporate profits are drying up. Maybe companies are starting to realize they have too much debt. Or maybe it’s because stocks are expensive. According to the popular CAPE ratio, stocks in the S&P 500 are 62% more expensive than their historic average. Since 1881, U.S. stocks have only been more expensive three times: before the Great Depression, during the dot-com bubble, and leading up to the 2008-2009 financial crisis.

Like any investment, buybacks only make sense when stocks are a good deal. With stocks as expensive as they are today, buybacks are a terrible use of money.

Without buybacks, there won’t be much to keep U.S. stocks from falling..…
If you own stocks, take a good look at your portfolio. We recommend that you get out of any company that needs buybacks to retain shareholders. We also encourage you to put 10% to 15% of your wealth in gold. As we often say, gold is real money. It’s preserved wealth for centuries because gold is unlike any other asset. It’s durable, easy to transport, and easily divisible.

Gold is also the ultimate safe haven asset. It’s survived economic depressions, stock market crashes, and full blown currency crises. When investors are nervous about stocks or the economy, they buy gold.
The price of gold has jumped 27% this year. It’s beat the S&P 500 4-to-1.

If you don’t already own gold for protection, we encourage you to do so immediately..…
According to Casey Research founder Doug Casey, the financial system is held together by “chewing gum and bailing wire” right now. When the public wakes up and realizes this, “they’ll flock to gold… just as they’ve done for centuries.” Doug thinks this could cause the price of gold to easily soar 200% in the coming years.

You could make 2x, 5x, or 10x that much money in gold stocks..…
Yesterday, we showed you how leverage works in the resource market. As we explained, this powerful force is why gold stocks can soar even if the price of gold doesn’t rise by that much. This year, gold’s 27% jump caused the VanEck Vectors Gold Miners ETF (GDX), which tracks large gold miners, to soar 128%.

Some folks might see that and think they missed their chance to buy gold stocks. But regular readers know gold stocks can go many times higher. During the 2000-2003 bull market, the average gold stock rose 602%. The best ones returned more than 1,000%. We expect even bigger gains in the coming years. To learn why, watch this short presentation. In it, Doug explains why we’re headed for “the biggest gold mania” he’s even seen.

By the end of this video, you’ll know why there’s never been a better time to own gold stocks. You’ll also learn how to make the most of this new gold bull market. We’re talking gains of 1,000%...2,000%...even 5,000%. Those kind of returns might sound impossible. But as you’ll see, Doug's hit many “home runs” like this throughout his career. And for the first time ever, he's showing the world exactly how he did this.

To learn Doug’s SECRET to making giant gains in gold stocks, watch this free video.

How Will Negative Interest Rates, the War on Cash, and “Helicopter Money” Affect the Markets?

Today, we have something special to share with you. Instead of the usual “Chart of the Day,” you’ll find a six-minute video presentation put together by our colleagues at Palm Beach Research Group.

In the video below, Palm Beach Research Group co-founder Tom Dyson and Palm Beach Letter editor Teeka Tiwari discuss how radical government policies are affecting global financial markets. As Tom and Teeka explain, these central bank “experiments” will have severe side effects. They could even push the price of gold to $5,000. To learn why, watch the video below.

If you like what you saw from Tom and Teeka, we encourage you to sign up for their “speed round” training series. Click here to get started.

The article Why Corporate America Can’t Prop Up Stocks Much Longer was originally published at caseyresearch.com.

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Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them?

By Justin Spittler

The largest shale oil bankruptcy in years just happened. If you own oil stocks, you'll want to read today's essay very closely. Because there's a good chance hundreds more oil companies will go bankrupt soon. As you probably know, the oil market is a disaster. The price of oil has plunged 75% since 2014. In February, oil hit its lowest level since 2003.

Oil crashed for a simple reason: There’s too much of it. New methods like “fracking” have led to a huge spike in global oil production. Today, oil companies pump about 1 million more barrels a day than the world uses.

Last year, America’s biggest oil companies lost $67 billion..…

To offset low prices, oil companies have slashed spending by 60% over the past two years. They’ve laid off more than 120,000 workers. They’ve sold assets and abandoned projects. Some have even cut their prized dividends.

For many oil companies, deep spending cuts weren’t enough…

The number of bankruptcies in the oil industry has skyrocketed….

Bloomberg Business reported earlier this month:

Since the start of 2015, 130 North American oil and gas producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone.

And that doesn’t even include two “big name” bankruptcies in the last couple weeks. Two weeks ago, Linn Energy filed for bankruptcy, making it the largest shale oil bankruptcy since 2014. It owes lenders $8.3 billion.

A week later, SandRidge Energy declared bankruptcy. It became the second biggest shale oil company to go bankrupt. The company owes its lenders about $4.1 billion. Ultra Petroleum, Penn Virginia, Breitburn Energy, and Halcón Resources also filed for bankruptcy in the past couple weeks.

Hundreds more oil companies could go bankrupt this year..…

The Wall Street Journal reported last week:

This year, 175 oil and gas producers around the world are in danger of declaring bankruptcy, and the situation is nearly as dire for another 160 companies, many in the U.S., according to a report from Deloitte’s energy consultants.

Defaults by oil and gas companies are already skyrocketing. The Wall Street Journal continues:

Oil and gas companies this year have defaulted on $26 billion, according to Fitch Ratings data. That figure already surpasses the total for 2015, $17.5 billion.

Fitch, one of the nation’s largest credit agencies, expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999.

Many investors thought the oil crisis was over..…

That’s because the price of oil has surged 80% since February. Dispatch readers know better. For months, we’ve been warning there would be more bankruptcies and defaults. We said many oil companies need $50 oil to make money. The price of oil hasn’t topped $50 a barrel since last July. Even after its big rally, oil still trades for about half of what it did two years ago.

Oil prices will stay low as long as there’s too much oil..…

Although the world still has too much oil, the surplus has shrunk in the past few months. In February, the global economy was oversupplied by about 1.7 million barrels a day. Thanks to U.S. production cuts, the surplus is now just 1.0 million barrels a day. The number of rigs actively looking for oil in the U.S. has dropped by 80% since October. This month, the U.S. oil rig count hit its lowest level in 70 years.

However, many other countries aren’t cutting production at all. Saudi Arabia and Russia, two of the world’s biggest oil-producing countries, are both pumping near-record amounts of oil. Frankly, these countries don’t have much choice. Oil sales account for 77% of Saudi Arabia’s economy. And oil accounts for 50% of Russia’s exports. If these countries stop pumping oil, their economies could collapse.

Low prices have made it impossible for some oil companies to pay their debts..…

U.S. oil companies borrowed nearly $200 billion between 2010 and 2014. If you’ve been reading the Dispatch, you know the Federal Reserve is mostly to blame for this. It’s held its key interest rate near zero since 2008. This made it incredibly cheap to borrow money. When oil prices were high, the debt wasn’t an issue. Companies made enough money to pay the bills. That’s no longer the case. Today, many oil companies are burning through cash to pay their debts.

To make matters worse, many weak oil companies have been cut off from the credit market..…

Before prices collapsed, oil companies could refinance their debt if they ran into trouble. This could buy them time to sort out their problems. These days, many banks will no longer lend oil companies money. Bloomberg Business reported last month:

Almost two years into the worst oil bust in a generation, lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are slashing credit lines for struggling energy companies…
Since the start of 2016 lenders have yanked $5.6 billion of credit from 36 oil and gas producers, a reduction of 12 percent, making this the most severe retreat since crude began tumbling in mid-2014.

Oil stocks are still very risky..…

But that doesn’t mean you should avoid them entirely. As we’ve said before, oil stocks have likely entered a new phase. You see, when oil prices first tanked, investors sold oil stocks indiscriminately. Both strong and weak stocks plunged. In other words, investors “threw the baby out with the bath water.” You often see this behavior during a crisis.

Exxon Mobil (XOM), the world’s biggest oil company, fell 34% since 2014. Chevron (CVX), the world’s second biggest, dropped 48%. Now that oil has stabilized, the stronger companies are separating themselves from the weaker companies. This year, Exxon is up 15%. Chevron is up 11%. The crash in oil prices has given us a chance to buy world class oil companies at deep bargains.

If you want to own oil stocks, stick with the best companies..…

If you're going to invest in the sector, there are four key things to look for: 

Make sure you buy companies that can 1) make money at low oil prices. You should also look for companies with 2) healthy margins 3) plenty of cash and 4) little debt.

In March, Crisis Investing editor Nick Giambruno recommended a company that hits all of these checkmarks. It has a rock-solid balance sheet…some of the industry’s best profit margins…and “trophy assets” in America’s richest oil regions. It can even make money with oil as cheap as $35.

The stock is up 9% in two months. But Nick thinks it could just be getting started. After all, it’s still 30% below its 2014 high. You can get in on Nick’s oil pick by signing up for Crisis Investing. If interested, we encourage you to watch this short presentation. It explains how you can access Nick’s top investing ideas for $1,000 off our regular price.

This incredible deal ends soon. Click here to take advantage while you can.

You’ll also learn about an even bigger “crisis investing” opportunity on Nick’s radar. This coming crisis could radically change the financial future of every American. By watching this video, you’ll learn how to profit from it. Click here to watch.

Chart of the Day

Oil and gas companies are losing billions of dollars, we’re in earnings season right now. This is when companies tell investors if their earnings grew or shrunk last quarter. A good earnings season can send stocks higher. A bad one can drag stocks down.

As of Friday, 95% of the companies in the S&P 500 had shared first quarter results. Based on these results, the S&P 500 is on track to post a 6.8% decline in earnings. That would be the biggest drop in quarterly earnings since the 2009 financial crisis.

Oil and gas companies are a big reason U.S. stocks are having such a horrible earnings season.

As you can see below, first-quarter earnings for energy companies in the S&P 500 have plunged 107% since last year. Keep in mind, this group includes Exxon, Chevron, and other blue chip energy stocks.

Again, if you’re looking to buy oil stocks, make sure you “look under the company’s hood” before you buy it. Steer clear of companies that are losing money and have a lot of debt.

The article Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them? was originally published at caseyresearch.com.

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How Much Will a 15% Hair Cut Cost Your Investment Capital?

Over the past few weeks I have been watching the DOW and Transportation index closely because it looks and feels like the Dow Theory may play out this year and the stock market could take a 15% haircut.

But what if you skipped on the haircut and opted for a 40% refund?  What? Keep reading to find out how.

Keeping this post short and sweet, I think the U.S. stock market is setting up for a sharp selloff. And it will look a lot like the July 2011 correction. If my calculations are correct this will happen in the next 3-9 weeks and we will see a 15% drop from our current levels. Only time will tell, but I have a way to hedge against this with very little downside risk to you ETF portfolio.

The Dow Theory Live Example for ETF Portfolio

The daily chart of the SP500 index below shows our current trend analysis with green bars signaling an uptrend, orange being neutral, and red signaling bearish price action. Currently the bars are green and we can expect prices to have an upward bias.

The Dow Theory could be  in play. When both the Transports (IYT) and the Dow Jones Industrial Average (DIA) cannot make higher highs and start making lower lows, according to the Dow Theory the broad stock market is topping.

We are watching the market closely because they have both made lower highs and lows.  This rally could stall in the next couple weeks and if so we expect a 15% correction.







Take a look at the 2011 Stock Market Crash



The chart above shows how fearful traders have a delayed reaction to moving money from stocks to a mix of risk-off assets.

The choppy market condition during August and September clearly helped in frustrating investors and created more uncertainty. This helped prices of this ETF portfolio fund rally long after the initial selloff took place. This is something I feel will take place again in the near future and subscribers of my ETF newsletter will benefit from this move.

Because we have a Dow Theory setup, our risk levels are clearly defined as to when to exit the trade if it does not play out in our favor. But with the potential to make 40% and the downside risk only being 4%, it’s the perfect setup for a large portion of our ETF portfolio. And just so you know this is not a precious metals trade as we are already long that sector and up 10% in that position already.

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Chris Vermeulen
The Gold & Oil Guy.com