Chapter 14
Getting Metallic Without Getting Heavy
In This Chapter
Pricing the heavy-metal economy
Exploring the fundamentals of gold markets
Finding the trading line for silver
Going platinum (just not blonde)
Following the trends and markets in copper and other industrial metals
Strategizing for trades in copper futures
When I think of heavy metal, I think of loud music, long hair, and fast guitar licks. And if you look hard enough, you may even see me at one of those increasingly popular 1980s’ metal reunion tours during the summer because I like to see those old boys still strut their stuff.
The other side of heavy metal has nothing to do with music, but it’s still quite industrial and can be just as profitable as record sales and concert grosses. Indeed, metal futures (you knew I’d get around to it, didn’t you?) experienced a significant revival because the global economy, largely influenced by aggressive growth in China, has brought the luster back into what was a largely faded area of the futures markets.
Metals divide into two major categories: precious and industrial. The markets of the two different classes look at the same side of the economy but from different angles. Although precious metals are thought of as hedges against inflation, price changes in the industrial metals category usually are precursors to the start and often the end of economic cycles.
From a trading standpoint, especially from that of a beginner’s, the best way to get started in the metals markets is to become familiar with the gold and copper markets. They’re the two most economically sensitive of all the metals. In this chapter, I focus on gold and copper, but I also tie in enough information about silver, platinum, and the other industrial metals to understand how the markets for each of them work.
Tuning In to the Economy
The prices of precious and industrial metals are linked to economic activity. Gold steals all the headlines, but the industrial metals do much of the work. Here’s what I mean: Rising economic activity leads to increasing demand for industrial metals. When industrial activity reaches the point where demand starts to outstrip supply, inflationary pressures start to build in the system. At that point, gold prices can start to rise.
Industrial metal prices are sensitive to demand. Copper prices, especially, can be a leading indicator of an increase in economic activity, given the widespread use of the metal in housing, electronics, and commercial construction. The flip side is that the copper market can start to sag, and prices can start to drop several months ahead of data such as Gross Domestic Product numbers (see the section “Getting into Metal without the Leather: Trading Copper,” later in this chapter).
The key word here is can. With most of the world’s supply of gold in the hands of central banks — whose main goal is fighting inflation — the managers of those central banks know that speculators see rising gold prices as a sign of inflation. When gold rallies tend to get out of hand, central banks start selling the metal from their huge stockpiles, and prices eventually fall.
No one really knows whether central banks are heavy buyers of gold when the price starts to fall; however, central banks can plausibly become gold buyers of last resort when the fears of deflation hit the market or prices continually decline.
The fact that central banks tend to be gold sellers during rallies doesn’t mean gold prices can’t rally for significant periods of time. It just means that central banks are a formidable market opponent of the everyday trader and that the days of straight-up advances in gold where smart speculators make or break their lifetime’s fortune, although still possible, aren’t as likely as they once were.
And just so you don’t go around thinking that I’m pushing conspiracy theories, you can check out all kinds of extreme and sensible commentaries on central banks and gold anywhere on the Internet.
A good commentary at Financial Sense.com (www.financialsense.com/fsu/editorials/2004/0308.html) summarizes a fully disclosed five-year plan of gold sales by central banks.
Acknowledge that gold is “an important element of global monetary reserves.”
Set limits of sales over the five-year period of the program to no more than 500 tons per year and no more than 2,500 tons over the entire five-year period.
Won’t sell more gold than they have in reserve.
Review the agreement in five years.
The bottom line is that gold is a tricky market because of central banks and the role they play in it. On the other hand, industrial metals such as copper offer more transparency in their pricing patterns because of their close relationship with economic expectations and economic activity.
Gold Market Fundamentals
South Africa is the world’s largest producer of gold, accounting for 25 percent or more of all global production and 50 percent of the accessible reserves. Russia, the United States, Canada, Australia, and Brazil make up the rest of the top-tier producers.
The all-time high in gold prices was set in January 1980, when the price of the October contract hit $1,026 per ounce as the spot-market price rallied to $875. By February 2008 gold had moved back over $1,000 for a brief spell as the weakness in the U.S. dollar and inflationary pressures from China pushed prices upward. In March, gold prices crashed and burned also, taking prices back down below $1,000. The decline started minutes after Federal Reserve Chairman Ben Bernanke lowered interest rates, but changed the Fed’s message to the markets highlighting the central bank’s concern about inflation.
Here are two key factors to keep in mind about the gold market:
Two major influences have an effect on gold prices. They are
• Major political upheaval: Political crises tend to be the major reason for gold prices to rise.
• Inflation: The influence of inflation on gold prices is much less intense than it was in the past because of the management of gold prices by the central banks.
The most reliable influence in the gold market is its relationship to the U.S. dollar. Figures 14-1 and 14-2 show how the trends of gold and the U.S. dollar reversed after the events of September 11, 2001, and how they accelerated after the U.S.’s subprime mortgage crisis. The Federal Reserve (the Fed) lowered interest rates in both cases, in effect printing money and decreasing the value of the dollar, which brought the gold bugs out of hibernation.
The price of gold can be confusing, so here’s a quick primer. The international benchmark price for gold is the London Price Fix, which is set in U.S. dollars and is quoted in troy ounces twice daily as the a.m. fix and the p.m. fix. The London exchange summarizes global gold trading as these composite prices.
Gold trades around the world on major exchanges in China, the United Kingdom (UK), and the United States. India and China are countries with expanding demand for gold.
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Figure 14-1: Gold bottoms near September 11, 2001, and accelerates its advance in 2007 as the U.S. dollar weakens. |
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Figure 14-2: The U.S. dollar breaks down after September 11, 2001, and again breaks to new lows as the subprime mortgage crisis hit. |
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Spot gold and gold futures trade on the New York Mercantile Exchange (NYMEX). Gold futures also trade on the Chicago Board of Trade (CBOT) and have relatively low margin requirements for speculators. That means gold can be an attractive market for small accounts. As of November 2007, initial margin was $3,375, and maintenance was $3,375. The full contract margins at CBOT were $2,309 and $1,710.
Mini contracts are smaller versions of the original contract. The mini contract for gold futures also trades on CBOT. As of November 2007, mini-sized gold margins were $770 and $570 for initial and maintenance. In the case of gold, a mini contract contains 33.2 troy ounces of gold, compared with a full-size contract that holds 100 troy ounces. The margin requirements are smaller, but the general characteristics and fundamentals of the market remain the same.
You can find several reliable information sources for gold on the Internet. Two I like to use are the World Gold Council (www.gold.org) and Kitco.com (www.kitco.com).
When trading gold and gold futures, you need to watch the following:
Actions taken by central banks around the world: Central banks tend to be net sellers. As a general rule, they either sell or stay out of the markets. See “Tuning In to the Economy,” earlier in this chapter.
The Fed, the European Central Bank, the Bank of England, and the National Bank of Switzerland usually are major players in the gold market, but any central bank is a potential seller, especially during periods of heightened inflationary expectations.
The geopolitical situation: Asia, the Middle East, and South America are global regions full of potential instability. The chance for terrorist attacks is rising on a daily basis and is likely to become something that remains a big influence from time to time during the next several decades.
Wars: Wars can lead to volatility in the price of gold. The expectation for higher prices during wars is often not met, given the frequency of major regional conflicts around the world and the frequent selling by central banks.
General weakness of the dollar and other major global currencies: The general relationship is for gold to rise when the dollar weakens. As with other traditional relationships, this rule isn’t set in stone but rather is a tendency caused by central-bank intervention in the gold and currency markets. This relationship is as reliable as any in the financial markets and is worth understanding and monitoring.
In 2007, the U.S. dollar fell to a new low as measured by the U.S. Dollar Index. The dollar fell to a level not seen since the 1970s.
At the same time, the price of gold moved above $800 per ounce. Noticeably, the price of crude oil was nearing $100 per barrel at the same time. The combination of higher oil prices, higher gold prices, and a lower dollar was confirmation that the financial markets were betting on inflation.
Inflation: If the Fed starts talking seriously about inflation and starts raising interest rates aggressively, the gold market is likely to respond with higher prices. For a major rally in gold to develop, the markets have to start believing that central banks can no longer control inflation. That hadn’t happened since the 1970s. In 2005, though, the Fed and other global central banks began talking more seriously about inflation. When they did, gold prices began showing some rising power. This accelerated in 2007 when all the world’s central banks had to pump large amounts of liquidity into the money markets as the liquidity crisis spawned by the subprime mortgage crisis spread throughout the world.
Technical analysis indicators: They can keep you on the right side of the trade. As with other markets (see Chapter 7 for an overview of technical analysis), moving averages, trend lines, and oscillators such as the MACD and RSI work with gold prices and need to be an integral part of your gold trading.
Lining the Markets with Silver
Silver is a hybrid metal because it’s used for industrial purposes and as a precious metal in jewelry. The silver market is extremely volatile and can be difficult to trade.
Mexico and the United States are the largest producers of silver. Silver mines usually can’t operate profitably when market prices fall below $8 per ounce. As a result, when prices fall below that level, production of silver wanes considerably, with much of it coming as a byproduct of copper, lead, and zinc mining processes.
When trading silver, you need to know these nuts and bolts:
One silver contract contains 5,000 troy ounces, with a 1 cent move being worth $50.
The modern-day trading range for silver is from 35 cents during the Great Depression up to $50 per ounce when the Hunt brothers tried to corner the silver market in the late 1970s.
When copper, lead, and zinc prices rise (especially because of decreased production), the price of silver is likely to rally because much of the world’s silver is a byproduct of mining and processing the other three metals.
Catalyzing Platinum
The platinum market is heavily influenced by Japan, where it’s the precious metal of choice. Although a precious metal, platinum also has hybrid qualities. In fact, it’s more often used as the key component in making catalytic converters for cars.
The relative economic strengths in Japan, in the automobile market and in the medical and dental fields — where platinum is also in demand — are the major influences on the price of platinum.
Platinum trades on the NYMEX in contracts containing 100 troy ounces. It can be thinly traded, though, and is best avoided by beginning traders. As with gold, South Africa is the world’s largest producer, with Russia second and, due to some recent finds, North America third. Platinum usually trades at a higher price than gold, because supply is much smaller — only 80 tons of the metal reach the market in any given year. For example, on October 28, 2005, platinum futures closed at $941 per troy ounce while gold futures closed at $474. As with any other market, you can apply the usual method of finding out about the fundamentals combined with technical analysis.
Industrializing Your Metals
Technical indicators are the key to predicting future trends in industrial metals, so you need to be on the lookout for the early clues before a trend changes.
The most important industrial metals (copper, aluminum, zinc, nickel, lead, and palladium) start to rally when the market senses that demand is starting to increase, or they start to fall back when the market senses supplies starting to stabilize. In general terms, then, trends in the industrial metals markets start to turn at these transition points. As a trader, you can’t get caught in the expectations game, though. You need to wait for the markets to make their moves; you don’t get a prize for being the first trader to buy something.
Although gold still is an important asset, the industrial metals complex is a better place for speculators to trade because it’s where supply and demand information and easily measured economic fundamentals (with good correlation to prices) are available and tested by price action and overall response in the markets.
Getting into Metal Without the Leather: Trading Copper
Copper is the third most-used metal in the world, and it’s found virtually everywhere around the globe. The most active copper mines are in the United States, Chile, Mexico, Australia, Indonesia, Zaire, and Zambia.
A beginning trader may be tempted to dive into the gold market, but some good reasons exist for considering copper first, especially its close connection to the economic cycle and the housing market.
Generally, I like to trade markets that have a good correlation to a sector of the stock market where I have access to company earnings and where industry executives are required by law to provide the market with truthful information by using widely disseminated means such as television and major media outlets. You can see what I mean in the next section.
Before that, though, you need to know a few things about copper before you start trading it, and these things have nothing to do with leather, smoke-filled stages, or headbanging. The keys to trading copper that I tell you about in this list set the stage for the more-involved data that follow.
Uses: The major uses for copper are in
• Construction and housing for plumbing and wiring
• High technology for wiring
• Semiconductor-related industries for wiring
Markets: Copper trades at the COMEX, which is a division of the NYMEX in New York, and at the London Metals Exchange. The London contract trades several times more than the U.S. contract in terms of volume, but both are liquid and active contracts.
Contracts: The COMEX contract is for 25,000 pounds of copper, and the London contract is for 55,000 pounds. New York prices are quoted in dollars and cents per pound, but London prices are quoted in dollars and cents per ton. Thus, a 1-cent move in New York is worth $250, and a $1 move in London in worth $25.
Setting up your copper-trading strategy
Figuring out key relationships within any market is your first step when analyzing it from a technical standpoint. One of my favorites is the relationship between the copper market and the stock of Phelps Dodge, and in turn, its relationship with the bond and housing markets. These interrelationships are as important as any you can find in the futures market, primarily because all the pieces depend on one another for a complete picture of their respective markets to emerge. Here’s why:
Phelps Dodge was a leading smelter and producer of copper. As a result, the stock had an excellent record of predicting the trend in market for the metal. The key to the success of the relationship is that stock investors start betting on the future trend of earnings for the company based on their expectations for copper demand, and thus, its connection to the company’s earnings in 2007. Freeport McMoRan (NYSE: FCX), another mining company that also mines for gold, bought Phelps Dodge. The addition of gold into the mix made me look for another bellwether. The truth is that I finally found two stocks that could serve the same purpose. One is Freeport McMoRan (NYSE: FCX), and the other is Southern Copper Corporation (NYSE: PCU). Together, these two stocks were almost as good as Phelps Dodge. What’s important is that you look at the copper stocks as well as the price of copper. The upcoming Figures 14-3 and 14-4 update the relationship between the stocks of the copper producers and the price of copper.
The housing market has a good correlation to the price action of housing stocks. The key is the information provided in monthly housing reports, especially housing starts and building permits. These two reports are the lifeline of the whole equation, because the Fed looks at them closely as it tries to figure out what to do with interest rates.
The housing stock that you use for this purpose needs to be one that behaves similarly in each cycle. I usually use Centex (NYSE symbol: CTX) or Toll Brothers (NYSE symbol: TOL), because they’re large capitalization stocks that service significant portions of the housing market. Toll Brothers is an upscale builder that usually is one of the last to top out because it serves richer customers who can last longer. Centex is a good cross-section builder that also works on commercial properties.
The bond market takes its cues from inflationary indications. For example, if housing prices rise too rapidly, and signs of bottlenecks appear in commodities markets for copper and lumber, the bond market starts to sell off and interest rates rise.
Charting the course
Putting copper market interrelationships together requires you to keep a close watch on charts of the components that I explain in the preceding section, including copper futures, shares of Phelps Dodge Corporation, housing starts and building permits, and the bond market.
Figures 14-3 and 14-4 show good examples of how these relationships worked with Phelps Dodge, and the historical significance of the relationship is worth chronicling. Notice the general trends of the metal (Figure 14-3) and the stock (Figure 14-4) and how they usually change directions within a close time frame of each other. Phelps Dodge topped in March while the metal was drifting lower. Soon after, though, the metal made a new low, and both rallied starting in May and heading into August.
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Figure 14-3: Six-month chart of copper futures for the September 2005 contract. |
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Figure 14-4: Six-month chart of stock prices for Phelps Dodge Corporation in 2005. |
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In Figure 14-5, you can see how housing starts started drifting lower in the spring of 2005 after hitting a high point in January. The slowing of housing starts correlates well with an intermediate-term top seen in the price of Phelps Dodge stock. Notice that as housing starts stabilized, Phelps Dodge and copper each staged yet another rally that reached new highs as it extended into August.
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Figure 14-5: Housing starts from January 2002 to July 2005. |
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According to Figure 14-7 (later in this section), Centex, a good representative of the housing sector, rallied a full two years before Phelps Dodge took off on its own rally. The reason the rally in Centex led to the rally in Phelps Dodge shows up in Figure 14-6. Copper prices were forming a base in the late 1990s, but only when the market started to price in the fact that demand for the metal would likely outstrip supply did the rally in Phelps Dodge begin.
Figure 14-7 shows something very important: Centex (right), a major U.S. homebuilder, began to falter at the same time housing starts began to drift. This move is more obvious in Figure 14-8, which shows the U.S. ten-year Treasury note yield rising dramatically on August 6, 2005, in response to a strong U.S. employment report. Note that on the day of the big move up in interest rates, Centex fell apart.
By August 16, Phelps Dodge also had fallen, but then something interesting happened in September and October. Hurricanes Katrina and Rita hit the U.S. Gulf coast, leading to massive housing and commercial building destruction. As a result, the market started pricing in a rebound in new construction, driving prices higher.
At the same time, during this period, China’s economy, as measured by gross domestic product (GDP), continued to grow at a 9.4 percent clip as the U.S. economy grew at a faster-than-expected rate, and copper prices moved to a slightly new high as the market factored in a rise in demand for copper in the wake of the rebuilding.
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Figure 14-6: Long-term view of copper prices. |
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Figure 14-7: A decades-long view of the prices of Phelps Dodge and Centex. |
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Figure 14-8: A huge one-day backup in bond yields drove interest rates up and housing stocks down. |
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In the following section, I discuss the relationship between copper and the global economy as the U.S. economy began to slow and the Chinese economy didn’t. This situation led to a slowing in the advance for the price of copper, while some of the demand for the metal slowed due to the weakness in the United States. However, the strength in China was good enough to keep things going.
My point is that markets react to circumstances as well as perception. A major top in copper was building as the housing market began to respond to higher interest rates, but an intangible set of events — in this case, the hurricanes — and the persistent growth of the Chinese and American economies led to a new leg up in prices. These circumstances give more credence to the relationship between interest rates, the price of copper, and the housing market.
Organizing the charts
I find it useful to organize the way I look at my charts on a timeline, and you may benefit from organizing the way you look at charts, too. Here are the steps that I take:
1. Look at daily charts.
Starting with a glimpse of daily charts helps you to get the current picture straight.
2. Look at longer-term charts.
I like to take a step back and view charts spanning years so I can put the current picture (from Step 1) in the right perspective. Orienting the short-term with longer-term charts helps you decide whether the current trading activity is within the long-term trend or a counter-trend move.
3. Look at shorter-term charts.
By shorter-term, I mean checking out charts that span either a few days or maybe even only an intraday time period (hours or even minutes) with an eye on optimizing my entry and exit points.
Here’s what you need to watch for when viewing your charts:
Interest-rate trends: Interest-rate trends are your leading indicator, because the housing market thrives on low interest rates. The big move up in rates in early 2005 wasn’t the top in copper, but it was enough to take the wind out of the rally’s sails for quite some time.
Differing timelines: By looking at the same chart using at least three different timelines, you focus in on a much clearer picture of what’s happening in the market. With practice, you can compile the trio of timeline data in only a few minutes.
Overall trends: Using a long-term chart like the one in Figure 14-5 as your guide, you can check out a market’s overall trend. You need to plan your trades based on the primary long-term trend. For example, if copper is in a three-year uptrend, you can expect pullbacks. You can short the pullbacks whenever they look like they’re going to last. However, as a trader, your main focus needs to be on trading the long side until an irrefutable break to the downside occurs. When that break occurs, you need to turn your sights to short selling, all the time knowing that you’ll eventually get short-term opportunities to go long.
An example of such a potential break came in November 2007, where the copper market failed to keep up with the advance in PCU. When the commodity fails to keep up with the bellwether stock, it can be a sign of trouble ahead. The two may not finally agree for a long time. The chart of the stock, for example, may feature a double top that closely corresponds to the time frame where the third peak of the triple top occurred in copper.
Economic News: You need to keep abreast of the news. In November 2007, the triple top in copper came as the U.S. economy was showing significant signs of a potential slowing due to the persistent problems in the housing sector. It was also a time when oil prices were near $100 per barrel, and China was in the midst of an energy crisis because its domestic oil companies were having a hard time keeping up with demand.
Trend lines: Never ignore a sustained move above or below a multiyear trend line. Watch trend lines closely. Figure 14-6 shows a new bull market forming in copper, starting in 2003 as the multiyear downtrend line was broken. So just as Pink Floyd sings, “How can you have any pudding if you don’t eat your meat?” — if you trade futures, keep this in mind: If you don’t read your charts, you’ll miss important turning points in the market.
Divergence in your charts: Make sure copper stocks and copper futures are moving in the same general direction. If they’re not, you have a technical divergence, a situation that can result in one of two scenarios:
• Futures will turn in the direction of the stocks.
• Stocks will turn in the direction of the futures.
Figures 14-3 and 14-4 show a small divergence between Phelps Dodge and the September futures contract. Although they bottomed in May, the move in copper was stronger than the one in the stock. It took until June for the full reversal in Phelps Dodge to confirm the rally in the futures.
Making sure fundamentals are on your side
Success in the futures market depends on how well you know the market in which you’re trading, technically and fundamentally. The economically sensitive metal markets are too difficult to trade without using both technical and fundamental analyses.
Here are some key tips on how you can make sense of technical and fundamental information:
Check housing starts. This key report shows you whether the current trend in copper is sustainable. For example, housing starts were flat in June 2005, a factor that was reflected in the July 19 report, which you can view at The Wall Street Journal online, www.wsj.com, when you subscribe.
Look beyond the headlines. The full text of the June housing report contained some important details about single-family home starts being down 2.5 percent from the May report. However, the number of building permits still was rising, so that particular number held up the market. Still, as the newspapers flaunted the never-ending housing boom, the June report was cautionary.
Check supply and demand. You need to know what supply-and-demand indicators like the Purchasing Manager’s (ISM) reports are saying.
A good way to get a grip on supply and demand is to see which industries are reporting growth and which aren’t from the ISM report, which also is available in full on The Wall Street Journal Web site. The July 2005 report was released August 5, 2005, just a few days after the Fed started to set the stage for a more aggressive stance toward higher interest rates and just before the housing stocks began to show signs of weakness. The list of industry sectors that the July ISM report said were growing included Instruments and Photographic Equipment; Food; Wood and Wood Products; Electronic Components and Equipment; Leather; Miscellaneous; Industrial and Commercial Equipment and Computers; Transportation and Equipment; Furniture; Chemicals; Fabricated Metals; and Textiles.
The sectors that the July ISM said were decreasing in activity included Printing and Publishing; Glass, Stone, and Aggregate; Primary Metals; Apparel; Rubber and Plastic Products; and Paper.
A quick glance at these sectors shows these factors:
• Several housing-related sectors were growing, especially the fabricated metals, such as steel, textiles, and wood, which are used in furniture. Indeed, furniture also was growing. The overall picture for housing, however, was mixed.
• Primary metals, copper included, were one of the weak sectors.
At a point in the copper market like the one described in the preceding list, you want to be careful, watch the charts, and wait for the next month’s report to confirm your suspicions that the trend may slow.
Getting a handle on the Fed
You must maintain a continued awareness of when the Fed’s board of governors and open market committee are meeting.
In early 2005, the Fed was getting annoyed with the housing market. Fed Chairman Alan Greenspan had described regional bubbles in selected markets and expressed mixed feelings about them. In July, Greenspan pointed to “signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”
The Fed’s governors like to make speeches or leak key concepts to the press. And that’s clearly what happened in 2005 just before the employment report was to be released August 6, 2005.
On August 3, 2005 (a Wednesday), Greg Ip, a reporter for The Wall Street Journal with a pretty good pipeline into the Fed, wrote: “As the Federal Reserve prepares to raise short-term interest rates again next week, officials there increasingly believe the bond market, which sets long-term rates, is diluting their efforts to tighten credit and contain inflation.” And it got even scarier: “Some policy makers worry that bond yields are being kept in check by overly complacent investor sentiment, which could rapidly dissipate, pushing up mortgage rates and shaking the housing market. Indeed, some Fed officials see similarities between the attitudes of bond investors today and of stock investors in the late 1990s.”
As the subprime mortgage crisis unfolded in 2007, the Federal Reserve was reluctant to predict a recession, but it was talking about a “significant” slowing in the growth rate of the U.S. economy. The Fed was also concerned about the inflationary effects of having had to ease interest rates and increase the liquidity available to banks due to the slowing in the housing sector. In fact, at the time the Federal Reserve was in a box. It knew it could cause an inflationary spiral by lowering interest rates, but it also knew if it didn’t it could cause a recession.
When the Fed is in a box, you want to watch the U.S. dollar and the gold markets. In 2007, it paid off quite well because the dollar fell, and gold rallied, giving you and me two good opportunities. One was to short the dollar, and the other was to go long on gold.
Getting beyond gold and copper
Other metals besides gold and copper trade in the futures markets. After you master — or at least become familiar with — the gold and copper markets, you can try your hand at aluminum, zinc, nickel, lead, and tin.
Most of them are more thinly traded than gold and copper, with the exception of aluminum, which can be very liquid.
The major influences are similar to the economic fundamentals for gold and copper: strikes and wars, individual metal stocks released regularly by the exchanges, and inflation.
Pulling it together
After you determine the long-term trend and check for potential land mines (such as the Fed clearly telling the markets that interest rates are going way up and for a long time), you need to core down your technical analysis toward the short term by doing the following:
Use trend lines, moving averages, and oscillators (see Chapters 7 and 8) to look for clear and precise entry points above key resistance when going long and below critical support levels when going short.
Always confirm your trades with at least two technical oscillators, such as MACD and RSI, before diving in.
Set sell stops or buy-to-cover stops, depending on the direction of your trade, by referring to moving averages or percentages as your guidelines.