When the S&P 500 does not make sense from the time frame you are looking at, you need to go one time frame out and look at the weekly chart.

Lots of traders get so focused on a daily chart that they somehow lose out on the bigger picture. Weekly charts are enormously helpful in giving clues to the future direction of the market.

This is a general rule that applies to all markets. Anytime things don’t make sense and you can’t find a pattern to trade in the time frame you are looking at, zoom out to a great time frame. Usually you’ll see a pattern you can trade.

In today’s video we examine one of the biggest markets in the world, the S&P 500, using a weekly chart. The video runs under two minutes in length and I think you will find it both educational and informative.

The relationship between deflation and silver may surprise you.

Deflation is a reduction in the common price level of products and services. Deflation develops when the yearly inflation rate drops under zero percent (a negative inflation rate), resulting in an increase in the real value of money – helping one to buy far more products with the same amount of cash. This must not be confused with disinflation, a slow down in the inflation rate (when inflation declines to lower levels). As inflation reduces the real value of paper money with time, on the other hand, deflation raises the real value of paper money.

Consequently deflation is bad for gold and silver because it raises the value of paper money. In other words one can buy a greater quantity of gold and silver with the same amount of paper money.

There were two substantial periods of deflation in the US.

The first was the recession of the late 1830s, following the Panic of 1837, when the currency in the USA contracted by about 30%, a contraction that is only matched by the Great Depression. This deflation satisfies both definitions, that of a decrease in prices and a decrease in the available amount of money.

The deflation of the Great Depression took place because there was a huge shrinkage of credit (money), bankruptcies producing an environment where cash was in frenzied demand, and the Federal Reserve didn’t properly accommodate that demand, so banks toppled one-by-one because they were not able to satisfy the sudden need for cash.

We are experiencing a huge contraction of credit (money) at this time. However overall, what went down in the Great Depression is very different than what we have today. There’s been no unexpected demand for cash and a run on the banks by members withdrawing their cash.

The second was following the Civil War, sometimes called The Great Deflation. It had been possibly sparked by a return to a gold standard, retiring paper money printed through the Civil War.

Once more, this is very different than what we have today. We’re not returning to the gold standard neither are we retiring a lot of paper money.

In the video tutorial below, I look at 20 years worth of data on silver and the S&P 500 and show you something you may find shocking. I entirely debunk the idea that silver is a safe place in a plummeting stock market.

Every strong uptrend you catch, like a surfer catching a wave, is one small step closer to quitting that day job you hate.

The latest run up in gold has more going for it than just gold seasonality.

Gold seasonality is the second half increase in gold starting on August 1st and ending early February of the following year. In late July gold tends to bottom and then start powering higher as autumn gold demand builds worldwide. The big seasonal rally in gold occurs between late July and late September. In October there is usually a pullback, and the next big seasonal rally occurs between November and February of the following year.

But this latest upward move in gold is supported by more than just seasonality.

August 12th 2010 is when the technicals first signaled an uptrend in gold at 1210.

The idea is to let our profits run, while getting out of losing positions quickly. That’s one of the key components to successful trading is to let your profits run. So let’s look at a possible upside target.

You can draw a neckline at about 1215 on a bullish inverted Head and Shoulders pattern. If you take the low point of the head which is 1170 and you count up to the neckline at 1215, that’s a 45 point move. Now if you add 45 to when the neckline was closed at 1215, you get 1260. That’s our target area. This 1260 target also is the June highs. What I will do is I may set my target to sell at just under the 1260 level to exit before a Handle retracement occurs on the giant Cup pattern that gold is currently forming.

It looks like gold is set to challenge the 1260 high. This can potentially be a Double Top and gold will head back down or it could break through 1260 in which case we’re off to the races.

Whatever happens, the trend in gold is clearly up.

In the short video below, the master trader Adam shows you what he likes about gold and where he sees it headed.

The morning of Monday, August 9 2010 was continuation from the late rally on the previous Friday. These types of huge upward moves at the end of trading are extremely important. At market open, the market is dominated by amateurs. At market close, the market is dominated by professionals. The reason is that the majority of amateur traders have day jobs that don’t allow them constant access to trading. Pros, on the other hand, trade all day every day. Amateurs and professionals trade against each other. For this reason the open and the close tend to be at opposite ends of a daily candlestick.

At around mid-day on Monday, August 9 2010, a small sell off took place but true to the late buying pattern stated earlier, the market had a good up move into the close.

Tuesday, August 10 2010 was unbelievably different. The market opened up having a massive gap down, with trading starting at 112.50 (SPY) as futures were trashed. Asian and European equities posted broad-based losses, with the Shanghai Composite index ending down 2.9%. The declines came after data demonstrated that China’s July trade surplus surged to $28.7 billion, as exports soared 38.1%. This was a clear case of foreign markets pulling down our markets primarily on the back of decreasing growth in China.

By mid-day, the news hit that U.S., wholesale inventories rose .1 percent in July, while sales fell .7 percent; economists surveyed by Reuters had predicted a far more robust build in inventories along with a sales increase. This pushed SPY right down to 111.50. But even slower development in China, unsatisfying wholesale inventories and sales, and also the anxiety of the emerging Fed policy statement did not stop the final hour rally. By the close, professional bull traders sent SPY back to where it opened at 112.50

Wednesday, August 11 2010 was horrific. The prior day’s U.S. economic data along with reports from China and Japan also illustrated the slowing down of the global recovery. Stock index futures dropped to session lows after the government reported a greater-than-anticipated trade gap of $49.9 billion in June.

The Fed declared it can help support the recovery by reinvesting maturing mortgage-backed securities in longer-term Treasury securities.

Traders commenced selling after the Fed announcement. The thing is, the Fed has been plainly proclaiming that it planned to lower the money it put into the economy as the recovery picked up pace. The Fed’s move of purchasing Treasury securities implies that the Fed must act to halt a double dip recession.

Next more awful news hit on August 11, 2010. Personal computer purchases are falling off a cliff as outlined by J.P.Morgan analyst Christopher Danely, which issued a research report downgrading his revenue and earnings estimates for Intel, our planet’s largest chip maker. Meanwhile, Robert W. Baird & Co. analyst Tristan Gerra provided a similarly glum evaluation of PC orders.

“Our own checks indicate a sharp deceleration in PC order trends continuing into August, following a below-expectation July month,” Gerra published in a note to customers. “Hopes of a meaningful recovery for the September month are less and less likely, in our view, leading to a likely below-expectations for next quarter.”

If you subscribe to my channel on You-tube or are a reader of my blog, you are already aware that tech must rally to bring us out of a bear market. Tech has always done this. This is known as Sector Rotation. Tech will be the sector that leads an economy out of a recession for the reason that it is technology that permits businesses to improve productiveness while reducing costs. Consequently with PC orders falling off a cliff, it provides institutions a definite indication that without the support of tech, this market is not yet ready to leave this recession. Along with the Fed’s action of buying longer-term Treasury securities, additionally, it means that this economic recovery is officially deceased.

Professional traders responded accordingly by rushing for the exits. By the end of the day on Wednesday, August 11 2010, SPY closed at 108: an astounding 3.8% drop in just hours. The VIX which measures the amount of put buying leaped 14% and technically went into an uptrend. Without a doubt, Wednesday was a critical day for the markets.

On Thursday, August 12th, 2010, the market traded generally flat. Very good earnings from GM were crushed by discouraging earnings from tech bell-weather Cisco and its lower earnings forecast moving forward. Also weighing in for the bearish side was documented weekly jobless claims rising 2,000 to 484,000, versus a drop predicted among economists.

Friday, August 13th, 2010 completely erased Thursday’s small gains and formed a sideways Rectangle pattern.

Inside the video tutorial below, I do stock chart analysis on SPY and give you my prediction for the week ahead. There exists a major pivot support zone you should short the market if it breaks below.

Important economic reports planned for release in a few days:

Aug 16 = NY Fed – Empire Manufacturing Index, NAHB Housing Market Index
Aug 17 = Housing Starts, Building Permits, PPI, Industrial Production
Aug 18 = Crude Inventories
Aug 19 = Unemployment Claims, Leading Indicators, Philadelphia Fed

The StochRSI indicator was produced by stock investors. The StochRSI indicator in Forex is the identical indicator. The fact that Forex traders have pilfered this technical analysis tool from stock traders definitely testifies to the accuracy and reliability of this technical analysis tool.

Made by Tushard Chande and Stanley Kroll, StochRSI is an oscillator that measures the level of RSI in accordance with its span over a set time period. StochRSI employs the Stochastics formula to RSI figures, as opposed to price values. This makes it an indicator of an indicator. The result is an oscillator that fluctuates between 0 and 1.

Within their 1994 guide, The New Technical Trader, Kroll and Chande, demonstrate that RSI can oscillate in between 80 and 20 for longer periods without hitting extreme levels. Recognize that 80 and 20 are utilized for overbought and oversold rather than the classical 70 and 30. Traders wanting to enter a stock determined by an overbought or oversold reading in RSI may end up continuously on the sidelines. Kroll and Chande, created StochRSI to raise sensitivity and create additional overbought and oversold alerts.

The StochRSI is most effective inside a trading market, not a trending market. A trading market can be identified with the trained eye as having nice swing highs to swing lows and frequently trading channels. An even more objective method to figure out if a market is trending or trading is to consider the ADX indicator.

When the ADX line is going up, a market is trending. In the event the ADX line is falling, a market is trading.

To help make the StochRSI work you need the ADX line to be dropping. This dramatically raises the accuracy of this indicator.

Within this training video, I utilize the StochRSI on the chart of the S&P 500. What most investors may well not know is that the S&P 500 changed from a trending market into a trading market back on June 14 2010. Consequently the StochRSI ought to be within your arsenal of weapons for trading.

A really significant pattern that I think you need to check out has developed on the Nasdaq Composite. This pattern is so accurate that there have been no losing trades in more than 2 years with it.

Going back to the July period of 2008 you can sketch three circles over the highs of a distribution pattern. The reason why I call it a distribution pattern is the fact that officially, it isn’t really a Head and Shoulders or some other pattern. From evaluating the pattern though, we do observe that it’s a distribution pattern that results from profit taking and shorting.

The three circles may be drawn over a eerily similar pattern that started in January of 2010 which ended last week.

If we do a trade triangle layover you can see that we have had a down monthly triangle. The reason that this really is so substantial is that the monthly triangle is used to ascertain the longer term trend that is down. Just how precise is the monthly trade triangle? Looking at the chart you can see that each monthly trade triangle since April of 2008 continues to be accurate. Making use of my Guerilla Stock Trading method of a 5% to 10% gain and also a 5% stop loss, we would have made money on each and every monthly trade triangle signal since April of 2008!

The weekly trade triangle is still up meaning the monthly trend and the weekly trend are in contradiction. The question you have to think about all boils down to whether the longer monthly downtrend will pull the weekly trend lower, or if the weekly trend has turned positive first and the monthly trend is soon to follow.

It looks like the case for a downward swing such as the kind we had back in 2008 when this pattern formed is a bit more likely. The reason why, beyond the truth that the larger trend trumps the shorter term trend, would be that the U.S. government came out last week and all but officially declared the economic recovery is now dead.

The brand new crises we’ve got is the fact that because of so many people out of work, state budgets must be cut. The cuts needed are so extreme that in certain government sectors, 50% of the workforce has been laid off.

Perhaps Caroline Baum of Bloomberg News said it best: That which you had would have been a government-approved course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It suffered frequent steroid injections from both monetary and fiscal authorities. And it continues to have no actual muscle mass.

Japanese candlestick picks and charting is a hundreds of years old trading strategy that was employed in the Far East for over 400 hundred years. The methodology was developed in the early 1700s in the Dojima Rice Exchange in Osaka, Japan for the trading of rice futures vouchers.

The concepts of the strategy were formalized by Japanese businessman Munehisa Homma. Mr. Humma stored in depth historical price records and findings of investor mindset. Mr. Homma was reputed to have accrued some considerable fortune. No one knows definitely and he may have passed away a broke trader. In otherwords, so far as we all know, the development of candlesticks could have been one vain endeavor by a crazy man to make money who eventually failed. Needless to say people that sell candlestick trading books and software are more than willing to propagate the rumor that Mr. Humma became rich but no one has produced reputable information verifying this rumor.

Candlestick charting was brought to the West by Steve Nison, with the publication of his book Japanese Candlestick Charting Techniques in 1991. Ever since then, candlestick charting has turned into a commonly accepted trading tool. Nearly all serious stock market charts have included candlestick charts as an option.

So what you just read about candlestick charting sounds neat. What a great story. But how about making money with candlesticks? Don’t waste your time.

When I first began trading, I lost thousands of dollars using candlestick charting.

Fundamentally, candlesticks are no better than any one technical analysis tool. Some one say they are actually worse.

The problem with candlesticks is that they are one day patterns. Some candlestick patterns are 2 days. Fewer are 3 days. There are even some 4 day candlestick patterns.

Here’s the question to ask yourself. Is it possible to predict the future price direction of a stock or market by looking at only 1, 2, or 3 trading days? If you said yes you are crazy. You do not know what you are talking about.

Longer term patterns trump shorter ones. Technical analysis tools like moving averages, MACD, stochastics, volume, and even most chart patterns take weeks to months to form. Even with using just 50 and 200 day moving averages, you are looking at 50 or 200 days worth of trading activity in order to predict future price direction. This works. This is establishing a trend over many weeks, months, and even years in order to predict investor psychology in the current market environment. The longer term technical analysis tools trump candlesticks because they form over much larger periods of time and larger pattern formations always trump shorter ones. This is not a subjective opinion, it’s objective fact. Anyone who thinks that 1 to 4 days of price movement can be used to predict good size moves in stocks is someone who has never tried.

This is not to say that candlestick patterns are useless. But here’s how I would rank them in terms of importance:

1. Downtrend channels, Head and Shoulders, and many other chart patterns.
2. Volume
3. Moving averages
4. MACD
5. Stochastics
6. Donchian Channel / Sar
7. 52 week high, 52 week low, 3 month high and low
8. Seasonality
9. Candlestick patterns
10. Astrology trading

Don’t get me wrong. All my stock charts are drawn with candlesticks because I can visualize them easier than High / Low bars. But using candlesticks to visualize a day’s price movement and using candlesticks to predict future price direction are two completely different things.

There’s a reason that candlesticks were used 400 years ago and ultimately they died out.

The idea of digging something out of a 400 year old trash can and then romanticizing it as if the Japanese 400 years ago were smarter and better traders than we are today is nonsense. But I do admit, it’s great marketing: “400 Year Old Secret Revealed Inside The Dead Sea Scrolls – Took 5 Linguistic Experts 10 Years To Translate!” or something dramatic like that. Great story that really sells, but as a price prediction stand alone tool it’s pretty pathetic.

If all the tools we have today including computers, these Japanese had 400 years ago, I’m confident that even they would not be using their own candlesticks.

Candlesticks were created as a by-product of their time. The people who created them couldn’t even make a computer, a car, or other engineering feats which require mathematics. In fact, many people 400 hundred years ago in Japan thought that their emperor was a god and only they ruling class was educated and even that was pathetic compared to Western civilization.

Imagine if a worm hole took a candlestick trader from 400 years ago, and planted him in a modern day trading room today. You’d have a guy in a robe scratching candlesticks on parchment and charting maybe 20 stocks and markets in a day. Compare that to a guy sitting in front of a computer scanning over 20,000 charts in real time looking at 8 other technical analysis tools (everything I listed above) beyond just candlesticks, and using sector rotation and inter-market analysis to make a prediction on which way a market was headed, and doing it all before the guy with the parchment was done scribbling his first candlestick. Now tell me the 400 year old Japanese candlestick trader wouldn’t gladly use his parchment as toilet paper after seeing what a modern day trader can do.

You should be in cash right now.

Until we see what happens with the 200 day moving average, the sidelines is the place to be.

We have had a series of Dojis form right over the 200 day moving average. This is telling us that the psychology of traders right now is that of uncertainty.

Intra-day the S&P 500 broke under the 200 day moving average line on Friday but re-took it by market close forming another Doji for the day.

The key pivot level to keep your eye on next week is 110. A close below this level with an additional day of confirmation would send SPY back down to test the 107 level.

In this video, I show you my reasoning for why I give this market a sidelines rating.