Thursday, June 28, 2007

Aluminum and Gold Stocks

This is another chart that does not give buy or sell signals everyday, but does, nevertheless, make up an important part of my toolbox. The chart below shows that the price of aluminum and gold stocks are correlated. The blue area of the chart represents the price of aluminum, and the solid line represents the price of gold. As you can see, the two tend to move in tandem.

The value of this chart comes from observing when the price of aluminum becomes overbought or oversold on the RSI. When this occures, it triggers a buy or sell signal. I have drawn lines connecting these zones to the chart at the very bottom, which is of XGD.

As you can see from the above chart, when the RSI is overbought, a draw down in XGD can be expected. On the other hand, when the Aluminum RSI becomes oversold, it tends to represent a good buying opportunity for XGD, or GDX for that matter.

One of the reasons I am posting this chart today is because this chart has just recently given a buy signal. If you look at the chart, the RSI is in oversold territory. I took a snapshot of this chart a couple of days ago. The reason it gives a buy signal now is because experience has taught me to wait a couple days after the signal is given. This is why the vertical lines are slanted in the above chart.

So, I'll put this post out there, and when you look back at this post, you will be able to see for yourself if this signal given was valid or not.

No comments: