How to trade or invest in oil in this market

A couple of months ago, WTI crude oil was selling for more than $100 a barrel. If you would have told a trader or an investor that WTI crude oil would be fighting to reach $50 today, he would probably have laughed at you. But today, traders and investors were cheering oil which saw WTI rise 3.6% to $49.21 a barrel. Is this the sign of a new trend, or is it simply short term noise fuelled by news like what's happening in Yemen? And more specifically, how to turn out a profit trading or investing in oil companies in that environment?

How to invest in oil?

According to traders and investors I see arguing over oil prices on social medias, oil will go down, up, or sideways. Who's right? My answer will both disappoint and relieve you; they are all right. The reality is that asking where oil is going is asking the wrong question. Over long periods of time, we know that oil will fluctuate a lot from undervaluation to overvaluation, that's a fact of the "free" markets. Will oil go up in the long run? Of course it will! But do you have the patience to wait the time that it takes? If you're in for the long run, then buying oil now could turn out to be a lucrative idea. You could also buy puts options as insurance if you're scared oil might go dramatically down. They will protect the value of your shares, as your house insurance protects the value of your home. 

How to trade oil?

If you're a trader, then you don't have months or years in front of you to get your money back. You want your money in, and you want your miney out, with a profit. Why gamble by choosing a direction when you can bet on volatility? Oil volatility is near its peak as you can see on the chart below.

One strategy would be to buy a call option and a put option at the same strike price and same expiration. You would lose your premiums if oil move sideways, but you will make money if oil moves either up or down. However, if your expiration date is far enough, it is highly improbable that volatility will suddently remain flat until your options expire. 

Ask yourself the right question

Instead of trying to guess where oil is going, try to understand your position and what you want to do exactly. Then, adopt the right strategy for your position. Trying to guess day after day if oil will go up or down is a receipe for a lot of stress, frustration, and potentially portfolio disaster. 

Are you ready? CPI, PMI Manufacturing, and New Home Sales

It is said that time goes by faster when you're busy. Well, expect this morning to pass you by like a Bugatti Veyron with all the important indicators that will be released: CPI, PMI Manufacturing, and New Homes Sales. Lets look at how they can impact gold, the stock market in general, and the stocks I'm currently holding.

Consumer Price Index at 8:30

Let's start by the indicator impacting the most consumers; CPI. The Consumer Price Index measure the increase or decrease in consumer prices for a basket of goods. Through the years, the items in that basket change when the Bureau of Labor Statistics recalibrate the value of different items. For example, is the value of a television set 10 years ago the same as today? 

One of the two indicators that the Federal Reserve is watching closely is the CPI. If there's a surprise today and it increases more than expected ( CPI y/y of -0.1% is expected), then it may be a signal for the FED to increase rates sooner. Even if they don't do it, at least that's what investors and traders will think. Therefore, in that scenario we can expect stocks and commodities prices to go down.

PMI Manufacturing at 9:45
PMI Manufacturing is one of the most important leading indicators. It is basically a survey sent to purchasing executives of 600 industrial companies. Expected is a reading of 54.6. If it's higher than that, then again it could scare investors and traders in thinking that the FED will raise rates sooner than expected. In that scenario stocks and commodities prices would go down also.

New Home Sales at 10:00
New Home Sales is similar to Existing Home Sales, except that it only tracks new homes. Analysts expect a reading of 464K new homes sold for this month. New Home Sales is also a leading indicator. Therefore, a better than expected reading could be bearish for stocks and commodities, again because investors and traders would be scared that the FED hike rates sooner than expected.

I personally own Five Below (FIVE), COS.CA (COS.TO), and Tesla Motors (TSLA). If those indicators readings are better than expected it could be bearish especially for FIVE and TSLA how are positively correlated with major stock market indexes.

Existing home sales and what it means for gold and the stock market

Donald Trump once said: "Well, real estate is always good, as far as I'm concerned." This is from an individual point of view of course, but can we expect the Existing Home Sales numbers that will be released at 10:00 this morning to be good? Let's take a look at what we can expect and what will be the impact on gold and the stock market.

Existing Home Sales, for those who don't know, basically track the number of existing homes, condominiums and co-ops that have been sold during the month. It is considered a leading indicator for the economy, meaning that where it goes the economy goes (in theory). You can see on the chart above that in 2006 the Existing Home Sales started to collapsed before the financial crisis. The stock market followed right after.

The general expected Existing Home Sales figure is 4.92M for this morning. Generally, we can assume that the stock market and gold have already priced in this expectation. There are three scenarios possible this morning. The first one is that Existing Home Sales are in line with expectations, in which case we shouldn't see gold or the stock market react after the release of this indicator.

The second scenario is that there's a better reading that expected; let's say something around 5.2M. This would send the signal (in theory again) that the economy is improving. We could expect an outflow from gold to other assets in this case, because of the decrease in fear of investors. This, among other factors, could pump the stock market and make it run higher, for now.

The third scenario is a worst than expected reading; let's say around 4.6M. This could signal an economy that is stagnating or losing steam. This situation would be good for gold as investors would want to hedge against a stock market dip. The stock market, when not disconnected with economic reality, should in theory follow a bad Existing Home Sales reading down.

In reality, a lot of other factors are influencing whether gold and the stock market will go up or down. What I'm personally looking for is the second or third scenario, in which case I could profit from a surprising reading.

Will ReWalk run up soon?

There are millions and millions of disabled people who can't walk on Earth. ReWAlk (RWLK) has a unique and noble mission; helping those poeple walk again with the help of exoskeletons. Altough it is easy to be touched by their offering, are ReWalk shares worth buying?

With a capitalization of about $150M, ReWalk has a lot of room to grow. Furthermore, it is the only exoskeleton that the FDA approved, so basically there is no direct competition. Of course, there is indirect competition such as stem cells based potential cures, but those are probably decades away. ReWalk can prove to be the perfect solution in the meantime.

However, the problem is that ReWalk is not affordable at $85K. Seriously, how many disabled people can afford that? Moreover the exoskeleton system is kind of clumsy and heavy. ReWalk is aware of those problems and the company is working both at lowering the price and improving the technology. Patience is required here, but how long should we wait? The stock market is already at his - or close to - its peak in my opinion. What if there's a crash soon? Will ReWalk be able to perform in an hostile economy? ReWalk already has poor financials and has no room for errors. 

On the bright side, the company revenue tripled in Q4 2014 to $1.5M. Also, I see the lockup expiration on march 11th being passed has a good thing. Investors that got shares at IPO had a chance to sell them and those who wanted to get out did.

My probabilistic model shows that ReWalk should go back up near to $20 in the next months. However, that's contingent of no new major road bump. I consider RWLK to be a speculative buy, but it can be rewarding to swing trade it.

Premarket trading plan summary

This should be a good day! Oil is up premarket and my COS.TO (COS.CA) should benefit from it. I’m still analyzing Canadian oil companies like Suncor Energy. I believe they represent probably the best opportunity out there for those who hold US dollars. This is mainly for two reasons.

The first reason is that when oil will go up, the stocks of those companies will also go up. Secondly is that the Canadian dollar versus the US is positively correlated to oil. Therefore, the potential is enormous.

As an example, let’s say I’m sitting on $10,000 USD that I want to trade/invest with. If I convert it to Canadian dollars I will have about $12,500 CAD. Let’s say I buy COS.CA at $9 per share it gives me about 1390 shares. If oil goes up and COS.CA goes back up to let say $12, and I sell them, I would get $16,680 CAD. Amazing right? Wait! Wait!

If oil goes up it also means the Canadian dollar will go up against the US dollar. So instead of CAD/USD at about 0.78 it could be 0.85 or even 0.9. If it’s 0.85 and I exchange my Canadian dollars back to USD I would now have around $14,200 USD. This is far more than if I would have invested in an equivalent US oil company.

I also see gold zigzagging around $1,170 an ounce and I’ll be watching miners closely today. Have a good trading day!

After hours trading summary

Today was a good day which saw FIVE up a bit more than 3%. However, oil dipped to lose all the gains from yesterday. I normally hang out on on forums and social medias related to trading or investing during the day, and I can see that opinions are polarized and vigorous when it comes to commodities.

The first group of people thinks that commodities are immensly overvalued and that they will sooner or later surge. The second group thinks that deflation will prevail and that commodities will continue their way down. The first group tend to see gold as money with intrinsic value. The second group sees gold as a useless piece of metal that can only be used in jewelries. Who's right?

The platonic truth is that both are right. Value is only created through the eyes of the one looking. Throughout history gold has been money, and then simply a tool used in jewelries. The value people put into anything follow the swing of a pendulum; from one extreme to another. If we admit that is the truth, then the only thing we can do is ask if gold is currently hated or loved by the pool of investors and traders. When most people think its only a tool, its the time to buy, and when most people think its money, its time to sell.

I believe that gold has been loved so much these last years, mostly because of the internet and the promotion gold has received, that this pullback is simply healthy. However, like Warren Buffett said:"Gold is basically being long on fear." 

Currently, people are not really scared. The US economy is "recovering" and world tensions seem to have eased. One can wonder what will happen when fear and consumer confidence sink? Gold will probably surge. For these reasons, I see gold more as an hedge than a speculative instrument.

Gold, miners, and their leveraged ETFs like NUGT and JNUG can be traded successfully. In my opinion however, they are not the easiest instruments to trade and make money with. The big advantage is that they will never go to zero. The big disadvantage is that big pockets with a variety of interests will try to influence them, and that may play against you.

That being said, I'm still watching miners to jump back in at one point. In the meantine I'm watching closely stocks like GPRO and TSLA who might turn out to be great opportunities.

After hours trading summary

This was a roller-coaster day where the FED once again saved the market. The fear of a rates hike scared investors, but even if Yellen removed the word "patient" from her speech, rates will remain at their current level.

"The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. - Yahoo Finance

That automatically made everything from gold to oil to stocks surge. The only big loser was the US dollar against other currencies. 

That's why I transfered a lot of my US dollars in Canadian dollar to invest in oil stocks. I bought cos.to(cos.ca) at $8.97 CAD today, which already jumped 7%. What's even better is that when oil is moving up I'm profiting in two ways; first with the oil stock itself, and then with the strengthening of the Canadian dollar. For those of you who dont know, Canada's economy rely heavily on oil, so oil prices and their stock market are highly correlated.

The stock I bought yesterday, FIVE, didn't move a lot today, and I'm hoping for more action tommorow or friday.

Gold was on fire today after Yellen's speech, with miners up around 5% and NUGT up 15%. I may jump back in gold later this week or next week. 

How was trading for you today?

Should you fear that the FED hikes rates?

Tomorrow we will see the end of a two days meeting from the FED. Some indicators seems to show strenght from the US economy such as the unemployment rate and total initial claims who both dropped. Will that be enough for the FED to hike rates?

Highly unlikely in my opinion. 

First, we can question the strenght of the economy. The big boys know this and that's why you hear the media still talking about a "recovery" 6 years after the recession. Some signals are more difficult to decode than others, like the ones sent by the bond market.

"The message from the bond market, supposedly, is that the world today is worse than it was than at any point during the Great Recession, which is nonsense," says Paulsen. 

-Yahoo Finance

Is it really nonsense? No one knows for sure, not even Paulsen. No one really knows what's the extent of the benefits and the dommages of the emergency measures the FED used and is still using.

Secondly, we have to think about the consequences of a rates hike. The US dollar would appreciate against other currencies making it more difficult for foreign investors to invest in the US. On top of the loss markets would inccur directly from the currency, investors would start to quickly get out from the stock market. Like Warren Buffet said: "Interest rates are like gravity for the stock market." The real question is not if people would survive another market crash. The real question is whether or not big businesses and the financial system would be able to absorb the shock. I don't think they would.

Finally, analysts are not expecting a rates hike tomorrow, but rather they want to see if Yellen will take out the word "patient" from her speech. If she does, it would mean a rates hike could be close. However, even if she removes that word, I think we won't see a rates hike this year. That being said, tomorrow could be a bloody day for the stock market if Yellen takes that route.

Pre-market trading plan summary

Oil is up pre-market which is a good news. I’m still holding UWTI at $2.85. I did some analysis this morning to confirm that I want to keep it and not sell it pre-market, and it is promising.

 Of course, oil is very volatile so we should expect swings. However, according to my model of oil, we should see USO hitting $18.60 this week at one point. This means UWTI should be back around $3.20 at one point.

Some interesting probabilities from my analysis for today are:

P(USO>18.11)= 98.75%
P(USO<18.11)= 1.25%

 If it goes up, I will set my take profits as I always do; in steps.

I know that a lot of traders are stuck in UWTI around $3.20-$3.30. Of course I can’t predict the future and I don’t recommend anything, but if I was in this situation (I would not be, because I use stop losses and would have been kicked out before) I would remain in UWTI and not sell from the time being. I would even maybe average down.

There’s also a rumor of the possibility of an OPEC emergency meeting. If you’re long oil, my opinion is to discard this news. If it doesn't happen, you won’t suffer from it if you have not based your decisions on it. If it does happen and you ignored it, you will have even more profit than you expected.

What do you think? - I wish you a good day trading and a lot of money! -

Have we avoided a recession?

By looking at this chart, you will notice that the S&P500 is cycling around the 10-Year Treasury Constant Maturity Minus Federal Funds Rate. When the rates spread is high it pulls the S&P500 up, and when it is down it pulls the S&P500 down.

The first questions is: What happened in 2012? It seems like we were about to get hit by another recession. This has been avoided for many reasons I wont mention here. However, you can see that the bounce is almost complete. When the spread is growing like this, it's not promising for the stock market

Does this mean we're heading right into a new recession? Maybe. Or I could answer your question by a controversial question: Have we left the last recession?

The monetary stimulus in place around the world could keep the situation at a status-quo for a very long time. George Soros already said stating his principle of reflexivity that sometimes the stock market can be so detached from the real economy that it can never come back.

Are we entering a phase of inertia? Will the stock market be pushed like a rock into space? Only the future will tell.

After hours trading summary

This morning I expected GDX to rise to in between $21 and $21.50. It came close for a while when it was oscillating between $20.80 and $20.90. I didn’t sell NUGT at these levels because I like to stick with my plan. I had a stop-loss set at $14.00 for NUGT, which got executed for a loss of about 2.5%. This week was not the best week, but hey, it happens. Be skeptical of anyone that tells you they always have good weeks.

What’s important in these moments is to:

1. Ask yourself if you made mistakes
2. If you did, understand them and be sure to not repeat them
3. Forget the loss and build a new plan for next week

By looking back at this week, I don’t see any mistakes I would have made. I had a well-designed plan backed by solid analysis, and I simply executed it. To go further, in my opinion, the result is irrelevant; In the long run I am profitable, and have been for years.

I will therefore spend a lot of time on step 3. Gold stocks like GDX and GDXJ can be awesome investments. However, trading them has been a headache this week and I think it will continue to be next week. I will therefore turn my attention to another commodity or maybe even change industry.

I will analyze a lot of stocks this weekend, so if you have any suggestion, be sure to leave me a comment with the symbol.

I will put my trading plan summary and my stock picks for next week in my newsletter, which will be delivered Sunday afternoon. Be sure to subscribe before then.

Pre-market trading plan summary

This inverted pyramid is a basic representation of the relationship that unites gold, GLD, miners, and leveraged ETFs. In my article after yesterday’s closing, I wrote that I expect GDX to surge to in between $21.00 and $21.50 today. That may or may not come true.

I see miners going up today if it is supported by gold. While I’m writing this article, gold has just surged to about $1212. Will it remain at this level, or will it go down when COMEX opens? I don’t know! But here’s my strategy for today.

I have no plan at all to keep NUGT, or any gold stocks for that matter, through the weekend. If you’re registered to my newsletter you will receive my point of view about where gold is going next week. For today, I will start setting take profits when GDX hits 21.10. If it goes down instead, I will sell it when NUGT hits about $13.50.

Expect today to be very volatile, and don’t trust the market, it may be full of surprise.

Have a good day trading, and make money!

Don’t forget to subscribe to my newsletter at your right.

Pre-market trading plan summary

Yesterday was a messy day for me. I had a position in JNUG at $28.27 with a stop loss at $27.50. I got kicked out at $27.30, to see JNUG bounce to 29 around 2 pm. I entered JNUG again at $29.69. This morning I’m sitting with gains over the two days period, but missed on big profit. Do I regret? Not at all. Yes, some will say that my stop loss made me lose money. I’d argue however that it saved me money countless times. Therefore, this strategy is very profitable over time, as my track record proves. This is not to justify myself, but rather to give another perspective; gains are not only made by good stocks picking and timing, but also with good money management.

As for today, I will set a sell limit pretty quick, because my analysis shows this JNUG surge probably is temporary. The charts shows “JNUG” but the analysis is really made for GDXJ.

The GAMMA fit is also amazingly accurate:

With:

P(GDXJ>27.3)=	43.62%
P(GDXJ<27.3)=	56.38%

Let’s make money today!

How to make a trading plan and confirm it’s solid

A solid and realistic trading plan is essential to everyone wishing to be profitable. You should ask yourself many basic questions such as “Why am I trading?” Even if I consider that all the steps are important in building your trading plan, I’m convinced that money management is THE foundation. It’s money management that saved me tons of money by stopping me to do stupid mistakes, like holding a sinking stock for too long.

So how do you build an effective money management plan? You need four parameters:

•        Your starting capital
•        The probability of you winning a trade
•        The percentage of profit you accept before closing a position
•        The percentage of loss you accept before closing a position

Your starting capital is easy to know, it’s simply the money you have available for trading.

The probability of you winning a trade is best determined by your trading history. Simply add up all the trades you did where you made a profit and divide that number by your total amount of trades. You will get a number between 0 and 1, hopefully closer to 1 than 0!

The percentage of profit you accept before closing a position is basically a take profit rule, or a floor on your profit. You could either say “Every time I get to 10% I sell automatically” or “If I get to 10% I’m setting a 10% limit rule.” The same goes for your stop loss.

I programmed a calculator in Excel where you simply have to input those 4 parameters. Then, click “Calculate”. 

Click here to download the calculator

This calculator will calculate your expected profit after 30 samples of 50 trades each. The goal for you is to find the most profitable strategy for yourself.

You don’t really have control on your probability of winning and your starting capital. They are what they are. However, you have complete control on your take profit and your stop loss. I noticed that even if I put so much emphasis on them, many people are just ignoring them. You can’t. You will lose without them, or be lucky and think it’s talent.

Once you have a solid money management plan, 80% of your trading plan is complete.

Don’t try to time the market for profit, simply respect your trading plan.