Editor’s Note: Eric Fry, here. Today, I want to introduce you to my colleague Tom Gentile. He’s a pioneer in harnessing the power of computers to spot profitable trading setups in the market.
Tom’s software helps him spot hidden patterns in the market… patterns you can profit from as a trader, is why he’s widely known as America’s Pattern Trader.
Take it away, Tom…
Hello, Reader.
It’s one of the biggest challenges traders face…
There’s endless chatter about financial markets in the mainstream media and online.
But most of it is meaningless “noise.”
So, how do you cut through the noise and focus ONLY on what matters?
In my more than three decades as a trader, I’ve found you can decode the market by looking at just five asset classes…
- Stocks
- Bonds
- Commodities
- Currencies
- Cryptocurrencies
These five asset classes represent the entire global economy.
The $93 trillion stock market… The $133 trillion bond market… The $131 trillion commodities market… You get the idea.
Now, that may sound like a lot of work. After all, we’re talking about five complex asset classes worth trillions of dollars.
But it’s easier than you may think…
You don’t need any fancy charting tools… or pricey market data subscriptions. You can track these asset classes simply by looking at one or two exchange-traded funds (ETF) for each.
Let’s dive right in…
Focus on What Matters
Stocks – SPDR S&P 500 ETF Trust (SPY)
The S&P 500 Index tracks the performance of the 500 largest U.S. stocks. It’s one of the most widely watched stock market indexes in the world.
SPY is an ETF tracks the performance of the S&P 500. And it’s the most liquid security in the market.
SPY is a great way to gauge the health of the overall stock market. And its deep liquidity makes it an easy way to buy or trade the market.
Analyzing SPY also reveals some of the market’s most powerful seasonal trends.
November to April is the “best six months” seasonal pattern (with April being the strongest month for stocks overall).
September, meanwhile, is the weakest month.
These historical seasonal trends are important to consider against current market trends and real-time data.
Bonds – iShares 20+ Year Treasury Bond ETF (TLT)
TLT tracks prices of U.S. Treasury bonds with remaining maturities greater than 20 years.
This gives you an excellent snapshot of the $133 trillion bond market.
And it’s a great way to gauge how investors are feeling about inflation.
Bond math means that prices go down (and yields go up) as inflation rises. So, if TLT is falling, it shows investors are worrying about inflation going up. If it’s rising, it tells you that inflation fears are waning.
Looking at a chart of TLT can also tell you a lot about what’s coming for stocks.
For instance, when TLT is trading in what I call the “Goldilocks Zone” (not too hot, not too cold), that’s bullish for stocks.
It tells you investors aren’t worried about rising inflation or dangerous deflation.
Commodities – United States Oil Fund LP (USO) and SPDR Gold Shares (GLD)
Commodities are the “stuff” that make the economy run.
Their prices tend to go up when the economy is growing, and demand is rising.
Likewise, their prices tend to fall when the economy is shrinking, and demand is falling.
You don’t need to keep an eye on the thousands of commodities that make up this $131 trillion market.
Cocoa, cotton, and coffee are commodities. But they don’t really matter to the overall economic picture.
So, I focus on two that really drive markets – oil and gold.
To get a snapshot of the oil market, I use the United States Oil Fund LP (USO).
It tracks the price of U.S. crude oil – also known as West Texas Intermediate (WTI)
When USO is going up, it’s usually a sign of increased demand from a growing economy. Plummeting oil prices, on the other hand, signal the economy is in trouble.
For gold, I track SPDR Gold Shares (GLD). This ETF tracks the price of gold by storing physical gold in vaults on behalf of investors.
Why is the price of gold important?
There are several reasons. But most important, investors see it as a safe haven during market turbulence.
If you see gold rising, it indicates that investors and traders are loading up ahead of an expected pullback or a correction. A falling gold price is usually a sign folks are happy loading up on stocks.
Now, oil and gold both have seasonal patterns that crop up throughout the year, and we pay close attention to both.
For example, next month, gold is entering a strong seasonal bull pattern. So I’ll be paying special attention to gold – and showing you how to profit – in the coming weeks in my free daily e-letter, Patterns & Profits.
Currencies – Invesco DB US Dollar Index Bullish Fund (UUP)
The U.S. dollar is the world’s reserve currency.
Even if you live overseas, if you want to buy commodities, they’re priced in dollars.
And roughly half of all international trade is done in dollars.
That makes it the most-watched currency in the world.
A strong dollar can have a negative correlation for stocks.
I could write an entire essay on the subject. But long story short, a strengthen U.S. dollar is often associated with higher interest rates, as investors flock to the relatively safer and higher-yielding U.S. assets.
Higher interest rates can increase borrowing costs for companies, reducing their ability to invest in growth and expansion.
A strong dollar also makes U.S. goods more expensive for overseas buyers.
And multinational companies that earn a significant proportion of their revenues overseas see the value of those foreign currency earnings drop in U.S. dollar terms.
So, I like to keep an eye on UUP for signs of a strengthening or weakening dollar to help inform my trading.
For example, if we’re in the middle of a seasonal bear pattern and the dollar is getting stronger, that’s additional confirmation that a bearish trade is the way to go.
If I’m already bullish on U.S. stocks, and I see weakness in the dollar, it may be time to place more bullish trades.
Cryptocurrencies – Bitcoin (BTC) and Ethereum (ETH)
Bitcoin is the world’s first and largest cryptocurrency. It makes up 54% of the $2.5 trillion crypto market.
That makes it the No. 1 indicator of the health of the crypto market.
When Bitcoin is going up, bullish sentiment takes hold and spreads to thousands of smaller coins. When it’s going sideways, the entire crypto market tends to follow suit. When it crashes, we can get a severe “Crypto Winter” bear market.
So, if you want to successfully trade the crypto market, you’ve got to pay attention to Bitcoin.
If Bitcoin is rallying, it also tells you that investors are in “risk on” mode. That’s good news for more speculative stocks, too.
I also look at the world’s second most valuable crypto, Ethereum (ETH).
Like every other asset class I track, crypto is subject to seasonal patterns and cycles.
Money flows first into Bitcoin… then into Ethereum… then into smaller, more speculative “altcoins” (coins other than Bitcoin).
So, when Ethereum is outperforming Bitcoin, I pay attention. It tells me the altcoin market is about to take off.
This helps me uncover outsized gains in the altcoin market – the kind you can trade for 1,000%+ gains in a short time.
At Patterns & Profits, I update my readers on these five asset classes every Monday afternoon in my Five Points of the Market video.
In just 10 minutes every week, I’ll show you:
The key levels I’m watching for each one…
How I think they’ll perform through the week…
And what it all means for your bottom line.
To join me and get free daily insights at Patterns & Profits, click here.
Good trading,
