DOATFT: In this market the only thing that makes sense is Trend Following

In a world where government deficits are rising, interest rates are at record lows, central banks are printing money, unemployment remains stubbornly high, and bank deposits are being raided to rescue insolvent banks, it is hard to believe that gold and silver have fallen so sharply. In this market the only thing that makes sense is Trend Following.

Strategy

I am now trading using two parallel trend following systems: System 2, used by the original turtle traders, and a moving average crossover (MAC) system which uses the 20-day and 45-day moving averages. As a result I am concentrating on a smaller number of commodities. These include wheat, gold, silver, and palladium.

Wheat trade

System 2 (green notation): As the chart below shows, on 16 November 2012 I went short wheat at 834 as it made a new 55-day low. On 27 March wheat made and new 20-day high issuing a sell signal at 739 and bagging an 11.4% profit. Two days later however, wheat broke to another new 55-day low causing me to go short once again.

MAC system (orange notation): The MAC system issued a sell signal back on 26 September when wheat was trading at 872, and it is yet to issue a sell signal.

I am currently short wheat using both trading systems.

A 6 month daily chart of wheat (Click on the chart for a larger version)

A 6 month daily chart of wheat (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Palladium trade

System 2 (green notation): On 15 January I went long palladium at $721.00 as it broke to a new 55-day high. On 21 February palladium made a new 20-day low issuing a sell signal at $713.50 and producing a 1% loss. On 10 April, however, palladium broke to a new 55-day low causing me to go short the commodity.

MAC system (orange notation): The MAC system issued a buy signal on 29 December at $676.00, however it flipped from a buy to a sell on 14 April producing a profit of 7.5% and instructing me to go short.

I am currently short palladium using both trading systems.

A 6 month daily chart of Palladium (Click on the chart for a larger version)

A 6 month daily chart of Palladium (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Gold trade

System 2 (green notation): On 18 December 2012 I went short gold at $1,671 as it broke to a new 55-day low.

MAC system (orange notation): The MAC system issued a sell signal on 31 October at $1,712.

I am currently short gold using both trading systems.

A 6 month daily chart of Gold (Click on the chart for a larger version)

A 6 month daily chart of Gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Silver trade

System 2 (green notation): On 20 February I went short silver at $29.16 as it broke to a new 55-day low.

MAC system (orange notation): The MAC system issued a sell signal on 22 February at $28.70.

I am currently short silver using both trading systems.

A 6 month daily chart of Silver (Click on the chart for a larger version)

A 6 month daily chart of Silver (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Final thoughts

In a world where government deficits are rising, interest rates are at record lows, central banks are printing money, unemployment remains stubbornly high, and bank deposits are being raided to rescue insolvent banks, it is hard to believe that gold and silver have fallen so sharply.

A whole host of analysts and market commentators have offered theories as to why gold and silver have suddenly crashed. The truth however, is that none of them knows for certain.

As I wrote on 4 January, “Shorting gold and silver at a time when central banks are pulling out all the stops to generate inflation and keep the global credit bubble alive goes against my better judgement. However being a successful trend following trader is not about judgement or trying to second-guess the market, it is about responding to price signals and following them wherever they lead.”

As a trend follower I don’t have to try to understand why a market is moving. I don’t have an opinion on whether the Dow is “due for a pullback”, or whether Apple “is now cheap”. I don’t have to study the news, or sentiment, or the Commitment of Traders report, or the minutes of the last Fed meeting, or the research notes from Goldman Sachs, or any of that stuff. At the end of the day it’s just noise. I only care about the price of an asset and whether it’s trending.

The bottom line is I don’t care about being right, I care about making money.

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