Tuesday, July 31, 2007

TSX at Support, Bullish Percent Looking Good

All Charts Courtesy of StockCharts.com

I'm just quickly going to go over a few charts on the TSX today. The TSX is Canada's main stock index, and it has many resource companies on it, so we want to see it rise when we are holding resource stocks, including gold stocks.

The first chart shows a daily chart of the TSX. I have made some annotations, which probably don't need further explanation.

The second chart is a bullish percent chart of the TSX. I explained how this chart works here. If you observe this chart, you will notice that whenever the RSI dips into oversold territory, a rally tends to develop in the TSX soon after. This is no guarantee that the TSX will rally this time, but I think it puts the odds in our favour.

That's all for the TSX analysis, but I also wanted to mention that I added some new material to this site. I added a search area, which is now available with all my other links. In addition, I added some new links, which I have under the header "Other Great Sites". Finally, I have added a bunch of book and DVD reviews, which you may find interesting.

Thanks again for visiting.

Monday, July 30, 2007

Always Keep the Long Term Picture in Mind

I'm afraid that some visitors to my site feel that I am contradicting myself when I simultaneously post evidence in favour of gold, and evidence against gold. The key point to understand is that when I do this, it is always in reference to different time frames.

One of the founding fathers of technical analysis, Charles Dow, stated that in any market there are trends within trends. Dow said that there are three trends within the stock market, which basically are short, medium, and long term trends.

A few posts ago, I said that the Euro was overbought and due for a correction. After this post, I made another post saying that the Euro was looking excellent for the long-term. A day after this post the Euro experienced the biggest decline for 2007. So, I was right when I said that the Euro was due for correction, but was I wrong about saying that it looked excellent for the long term?

Let's have a look at the long term monthly chart BEFORE the big Euro correction:

As you can see, the Euro is in a powerful uptrend, and the whole chart, in my opinion, looks very bullish. Now, lets have a look at the same chart, except AFTER the big Euro correction.

As you can see, even after the biggest correction for 2007, the Euro chart is completely unscathed, which means the long term trend is still, without a question, intact. After large corrections like the one we just experienced last week, it is important to keep the long term trend in mind.

Gold, Silver and the Euro are all in long term uptrends, while the US Dollar is in a long term downtrend. Personally, I keep about half my money in silver bullion to capitalize on this fact. With the other half I trade gold stocks on a short term basis. When I feel short-term bearish, I will go short gold stocks, but this really only has the effect of hedging my long-term core position.

Also, if anybody sees anything on the charts that indicates that gold stocks have bottomed out, let me know. I'm still not quite ready to jump back in, but maybe you see things differently. Write a comment if you do. Thanks!

Friday, July 27, 2007

Gold Stocks Damage Assessment

This was one of those weeks where anybody holding any kind of stocks likely got hit. The Dow had its worst week in 5 years, and the TSX lost more than 800 points. Gold stocks, like all stocks, went down again today. So, are we near a bottom?

Let's have a look at a CandleVolume chart of GDX, the American gold stocks ETF. I decided to show it in different colours just to give it a different effect.

The main thing to notice is how large the last 4 candles have been. This indicated that there was a tremendous amount of volume traded during these days. Falling prices on large volume is a bearish combination.

In my last post I said that there was not enough evidence to suggest that gold prices have stabilized, and I still feel that way today. The XAU failed to hold what I labeled as tentative support. Buying GDX today would be like catching a falling knife, and I am still waiting in cash until I get more evidence that we are at a bottom.

Although not shown, Canadian gold stock holders were not hit as hard. This is because the Canadian Dollar had a very bad day.

As you probably know, this fall in gold stocks was connected to a rise in the US Dollar, so let's have a look at that market to see what is going on. Below is a daily chart of the USD.

I have outlined two potential targets for the USD. If the USD index can find resistance at R1, then that would be a bullish development for gold prices.

In summary, if you are a day trader, then I would wait until there is more evidence to indicate a bottom. If you are a long term holder, then I would not be worrying very much. Also, please remember that this site is sponsored by Goldline. Thanks again for visiting.

Thursday, July 26, 2007

Old Resistance Becomes New Support

Gold stocks had a rough day today. In fact, the XAU was down almost 5% intraday, and the gold ETFs did not do any better. This post will be about assessing the damage, and trying to figure out what's next, but first let's look at a previous post.

Last Friday, I said, "To be more specific, I feel that the XAU chart will likely top out on Monday, July 23." Below is a chart of the XAU, and I have drawn a dashed line connecting July 23 to the exact top of the market.

What's more important is what is going to happen next. If you look at the above chart, you will see that the XAU has closed right on its old resistance line. This is an encouraging sign, however, it is not a strong enough piece of evidence to indicate a reversal.

At this point, I can't really say what is going to happen next. Personally, I closed my short positions today, and I'm just going wait in cash until I get a better idea of what's going to happen. I'll have to examine the charts for a least a couple of hours tonight, and as I come to any firmer conclusions, I will post them on this blog.

At the very least, I can say that the long term signals that the weekly and monthly charts generated are still valid, and the charts so far have not sustained any long term damage. This means, that if you are not a day trader, this may be a good time to dollar cost average. In any bull market, it never hurts to buy on dips.

Anyway, stay tuned for a more in depth look tomorrow. Thanks again for visiting my site.

Wednesday, July 25, 2007

The Significance of Round Numbers

Two posts ago, I mentioned that, on a short term basis, the Euro was due for a correction. Today, the Euro has melted down, and in this post I will explain one of the reasons why I felt the way I did.

One of the strategies I learned from a book entitled Day Trading the Currency Market, was called fading the double zeros. This strategy is about buying and selling at large round numbers, since these numbers are psychologically important.

Now, in terms of the Euro, there was no round numbers of importance, but in in terms of the US Dollar index, there was. On Friday, I noticed that the USD was approaching 80, and that there were likely many institutional buyers waiting with buy orders at that level. Sure enough, the USD descended right to the 80 level, at which point the buy orders started to rush in.

The chart below is a daily chart of the USD:

Here is a closer look at the USD bouncing off 80, the psychologically important round number. The dashed line represents the 80 level. Another reason the 80 level is so important is because the USD index has bounced off this level so many times throughout the years.

However, it's only a matter of time until this level is broken, and once it is broken, things could get really nasty for the USD. The USD is in a massive downtrend, and, in the long run, it never pays to buck the trend. This fact, that the USD is in such bad shape, will be one of the fundamentals that will drive gold higher for years to come. This is why I have always advocated buying physical gold or silver as means to preserve your wealth, and to participate in the gold bull market. This is why I put ads on my site from Goldline.

Thanks again for all those who commented in my previous post. I hope you'll enjoy the book I sent you. I appreciate that you have visited my site.

Sunday, July 22, 2007

A Long Term Technical Look at the Euro

In this post I'm just going to go over quickly a monthly chart of the Euro Index. This chart should help you understand the big picture for the currency, and how it will affect other markets. I believe that the long term implications of the following chart are quite bullish, and I will explain why.

In the chart below, each candle represents an entire month of price action. This chart goes back about 12 years.

The main thing I wanted to point out, and I'm sure you can see it already, is the enormous inverted head and shoulders pattern that has formed. This is obviously a very bullish development, and, if the pattern is completed, it could have implications for the Euro, and indeed Gold for many years to come.

The second thing I noticed about this chart is the double top that formed. The Euro hit its old 1995 high as marked by the second blue arrow, and stalled out. At the exact same time, Gold Stocks, as represented by the XAU, topped out, and experienced weakness for the first half of 2005. For those who do not believe in intermarket analysis, this would just have to be another coincidence.

One other note of interest, and this is for candle chartists, is the shooting star candle formation that occured in October, 1998. This candle, which is related to the gravestone doji, is one of the most ominous formations, in my opinion.

The final aspect about this chart I'd like to show you is the MACD Histogram. This indicator, when used on monthly charts, tends to be very reliable, with very few false signals given. I view it is a giant pendulum slowly swinging back and forth, from bull to bear market. As you can see we have swung into bull market territory.

That's all for the Euro analysis, but before I go, I'd like to say that I would like to hear your thoughts and constructive criticism about this site. So, the first 5 people who send me an email, or write a comment, will receive a free technical analysis ebook via email. This ebook is one that I have read, and you will be able to read it on your computer in its entirety. Thanks again for stopping by.

Friday, July 20, 2007

The Euro, the US Dollar, and Gold Stocks

So, it's been 30 days since I started my blog, and in that time I have posted 43 articles, under four different sections. For the 10 people who have visited my blog, I hope that you have enjoyed them. (I'm just joking, and I fully realize that the first month of starting a blog is always the most difficult. )

Anyway, in the last week, gold stocks have been doing better than I had even imagined. They have broken through all sorts of resistance, despite being uncomfortably overbought. I expect gold stocks to continue down this upward path for many weeks to come, as this is what my weekly charts have been showing me for a while now.

However, gold stocks will not continue up in one straight line. There will be corrections along the way, and I think we may be approaching one of those times. I'll show a few charts to support my case. Firstly, below is a daily chart of the Euro.

The two things to note in the above chart is how dangerously overbought the Euro is, and the candle formation that I have circled. The candle in the circle is a gravestone doji. For more information on this candle, please refer to the How To Read My Charts section of this site.

The next chart is a daily chart of the US Dollar:

The aspects of this chart to notice here is how oversold the US Dollar Index is, as well as the candle formations that have formed recently. Although not pictured here, the weekly chart of the US Dollar shows that it is right on support, which I feel will be broken, but probably not right now. This is all short-term gold bearish.

Finally, here is a daily chart of the XAU. You will notice that the XAU is right under gap resistance right now, which is not a good sign, in the short-term.

So, what does this all mean? It means that we may be in for a small correction, which is an absolutely healthy and essential part of all bull markets. To be more specific, I feel that the XAU chart will likely top out on Monday, July 23.

I hope it does not sound like I am contradicting myself, since I've been posting bullish evidence for gold in the last few posts. These items are still valid, and the signals they generated are still in effect. But they were all on a weekly time frame, which is a much longer time frame. The charts I have posted today are all daily, and are on a much shorter time frame.

If you see something in the above charts that I have missed, please make a comment, or send an email to: DannyMerkel@hotmail.com. Thanks for stopping by.

Thursday, July 19, 2007

A Bull Flag in the Gold Stocks Chart

Today I'm going to show a very long-term perspective of how gold stocks are doing. This will give you an idea of how healthy the gold bull market is, and perhaps give some insights into what is likely to occur in the future.

I'm going to post a monthly chart of the XAU. The excellent website, StockCharts.com, allows users to graph charts on many different time frames, including 1 min, 5 min, 10 min, 15 min, 30 min, hourly, daily, weekly, and, finally, monthly.

With so many time frames to look at, it does sometimes get complicated, but one thing to remember is that the longer the time frame, the more dominance it has, which is why the following chart is so important.

The above chart, which goes back to 1990, is of the XAU, the gold stocks index. This chart puts the gold bull in perspective. Some analysts say that gold prices have gone too far, and that the commodities boom is in some sort of bubble. However, if you look at the above chart, I think it is apparent that the bull market has been very orderly, and that this is not a speculative frenzy. In fact, gold stocks are lower than they were 10 years ago.

The point is, I believe by using the above perspective, the bull market in gold stocks has only begun, and has plenty of room to run. If this were baseball, we would only be in the second inning or so.

However, the main reason I posted this chart is to show the bull flag that has formed. A bull flag forms after a lengthy run up. The flag itself marks a time where the bulls take a breather, before they begin their second assault on the bears. I should also mention that the above chart was taken from my public chart list, and I have not altered it since mid June.

Traditional technical analysis dictates that once the flag has been broken, the length of the subsequent rise should be about equal to the pole. As you can see, the XAU has rocketed through this flag, and now a conservative target would be approximately 35% higher than current levels.

If you have any questions or criticisms, please send me an email. Thanks for looking.

Tuesday, July 17, 2007

A Closer Look at the S&P 500

I got an email asking me why all my stocks in the Trading With The Trend section of my site were Canadian. I will try to explain why in this post.

In a nutshell, the reason I post only Canadian stocks is because I feel that the Canadian Dollar is in a bull market, and the US Dollar is in a bear market. I try to pick stocks that are in uptrends, but if the US Dollar is continuously falling, it will negate much of the return. On the other hand, if you pick a stock that is in an uptrend, and the currency that the stock is denominated in is also rising, it will amplify your returns.

Many people, such as financial analysts, say that US stocks are doing great, and there is no need to invest outside the US. They will look at a chart that looks like mine below, and think that things are just fine.

The chart above shows the S&P 500 over the last 10 years. As you can see, it is indeed making new all time highs. So, what's the problem? The problem is that this growth is not real. It's an illusion.

Basically, what is happening in the United States is that the Government is printing massive amounts of money. Some experts say that the amount of money circulating in the US grows by about 14% a year. This money is printed to finance such efforts as the war in Iraq, which has set the US back about 300 billion dollars so far.

All this paper money has to end up some where, and a lot of it has found its way into the stock market. This stock market rally is only being fueled by excess liquidity, and not by anything else.

As a result of the printing presses running none stop night and day, there are more dollars floating around, and this has been the main reason why the US Dollar is in a bear market. It's simple. When supply increases, price decreases. And the US Dollar has been decreasing.

Now, let's look at the same chart as what was shown above, but this time, let's look at it in terms of the Canadian Dollar.

As the above chart shows, the S&P 500 is no where near hitting all time highs. This shows how deceptive it is to think that things are looking just fine in the US. In my opinion, the US Government has been doing a great disservice to Americans by increasing the money supply so irresponsibly, and I feel that it is in the best interest for everyone to diversify out of the ever diluted dollar, and into to something more solid.

The best choice I feel is physical gold and silver ownership. I personally own Silver bullion, and I have never regretted it. Other good candidates would be the Canadian Dollar, the Australian Dollar, or the Swiss Franc, in my opinion.

Anyway, to get back to my original point, this is why I feature Canadian stocks. I hope this made sense. Best of luck.

Saturday, July 14, 2007

Another Look at Stock Market Sentiment

I used to subscribe to a service that would mail me educational DVDs on trading and technical analysis, and, once I was finished watching them, I would mail them back, all for a monthly fee. Most of the DVDs I watched were not very good, but one DVD, by someone named Jake Bernstein, really caught my attention. Since then, I have watched about 6 DVDs from him.

In the DVD I first watched, Jake Bernstein talked about stock market sentiment. He explained that his company would phone several hundred brokers and traders, and survey them on their thoughts on the markets. What Mr. Bernstein found is that when the respondents were unusually bullish, the market was due for a correction, and when they were unusually bearish, a bottom was likely in place.

While most people don't have the time to survey people, this example illustrates one important fact, which is that the public is usually wrong. There are some creative ways to exploit this fact, and today, I will share one of them.

What I have done is look at the statistics of a popular Gold website called Kitco. Through a website named Alexa.com, you can find out how popular a website is, and graph this data. I have made a graph of how many people visited Kitco.com over the last year.

Using my graphic design skills (MS Paint), I have placed a graph of GDX, the Gold Stocks ETF, beneath it. The result is shown below.

This may be a bit of a stretch, but I have shown that spikes in web traffic at Kitco have resulted in tops in GDX chart. This worked really well during 2006, but not so well in 2007, and this is because Gold Stocks have been trading sideways for so long, that the public may not be interested anymore. Incidentally, this fact, that the public has lost interest, is actually a bullish development for Gold. This chart hopefully proves that when the public is interested, you shouldn't be.

Think about the Dot Com boom. Was everybody interested in Tech stocks in the early 1990's? No, nobody was. Was this a good time to buy? Yes, yes it was. Was the public interested in Tech stocks in the late 1990's? Yes, and I was too, but it was the worst time to get into that sector.

I will have more about gauging sentiment in further posts, I hope.

Friday, July 13, 2007

Good Times for Gold Investors.

Gold stocks have performed amazingly well over the past few weeks, and I'm glad to see that Gold Bugs are finally making some money. I have been trying to build a bullish argument for gold ever since I started my blog, and if you read my previous posts, I hope you will be able to see that.

However, I am not always bullish on gold. There are times where I will build a bearish case for gold, and I will justify it to the best of my ability. Right now, though, is not one of those times. Far from it. To me, the charts are saying that Gold stocks have a long way to run, and I have a lot of evidence to back this up.

Yesterday, I posted a powerful piece of evidence, which was the giant triangle on the XAU/GLD ratio chart. Today, I'll post another significant milestone.

The chart below is a weekly chart of the Euro. The Euro and Gold tend to trend in the same direction, so anything positive on the Euro chart is positive for Gold. If you glance at the chart below, you can see that the Euro is trading higher than ever before. It has broken out of a double top formation, and this is, on a long term basis, very bullish.

One thing to keep in mind is that this is a long-term signal. It means that Gold will likely be higher several months from now, but does not necessarily mean that Gold will go up tomorrow. In fact, on the very short term, there are some developments that I find disconcerting.

Firstly, the USD has been getting killed over the past few weeks, and is deeply oversold. The USD also has not broken long-term support, although, I know, it eventually will. What this means is that the USD could be due for another dead cat bounce.

Secondly, I would like to see Gold Stocks relieve some of their overbought condition before I'd invest any more of my money. This should allow them to rest up, and get ready for another wave higher, which is what the weekly charts are saying.

So, the bottom line is that Gold Stocks are looking excellent for the long-term, but vulnerable in the short-term.

Thursday, July 12, 2007

My Weekly XAU Gold Ratio Chart

I think this is a chart that many other gold traders look at. It is a ratio between the XAU and the Gold ETF, GLD. In other words, a ratio between gold stocks and gold bullion. This is a very essential relationship to look at. The reason it is so important is because in order for the bull market in gold to be considered healthy, gold stocks must be leading gold bullion. When gold stocks are outperforming gold bullion, it is considered bullish for both.

Let's have a look at a long term picture of this relationship. Below is a weekly chart of the ratio, so that each candle represents one week of price action. When the ratio line is rising, it means that gold stocks are leading, and when it is falling, gold stocks are lagging.

One thing that is interesting is that you can apply technical analysis to ratio charts, just as you can with ordinary charts. As long as traders are looking at it, you can apply technical analysis to it. In the above chart, notice the perfectly formed triple top, that I marked off with a horizontal blue line, and three down arrows. Each down arrow represented a good time to unload some of your gold holdings, although you could only capitalize on the last 2.

There is another feature about this chart that is incredibly interesting, and it applies right here and now. I am referring to the enormous triangle that I have outlined, which has been in development for about 18 months. As you can see, the ratio has, just now, broken out of this triangle. I feel that this is a long-term bullish indication.

Although there are many long term indications that lead me to believe that gold will be MUCH higher in a couple of months, there are still some short term hurdles. First, as a mentioned in my previous post, the XAU has gone up about 10% in a very short time, and is now overbought.

Second, the XAU is right at some major overhead resistance. I would be surprised if the XAU had enough energy to plow through this resistance without first taking a bit of breather to relieve the overbought condition, but anything could happen. The chart below is of the XAU, and the main thing to note is the red horizontal resistance.

On a completely different topic, I notice that Eldorado Gold is down about 30% so far today. I have no idea what happened, but I think this illustrates why I prefer to hold gold ETFs rather than individual stocks.

The Canadian gold ETF, symbol XGD, which I hold right now, has a weighting of about 1.5% of Eldorado Gold. This means that Eldorado's fall only has a negligible effect on XGD. If you were fully margined with Eldorado Gold yesterday, your account would be completely blown out today. This is why it's better to hold ETFs, and don't over-trade. Like most lessons I have learned, I had to learn this the hard way. I hope you don't have to.

Wednesday, July 11, 2007

Reading Stock Market Sentiment

Gold stocks have had quite a spectacular run over the last 2 weeks. The XAU, for example, has appreciated by about 10% during this time. To many people, this rapid ascent came as a surprise. Two weeks ago, when silver declined about 60 cents in one day, there were many that thought lower prices were in the cards.

I usually like to browse investing forums because I usually learn something when I do. One forum I visit often is the Kitco Gold Forum. Browsing this forum is a great way to judge sentiment. It allows me to evaluate if the public is bullish or bearish, and let me tell you, 2 weeks ago, the public was bearish. Here is a link to one thread of many that was brimming with bearish sentiment. There were some astute forum members that did not let fear cloud their judgement, but overall, throughout many threads, the consensus was bearish.

One June 26, I made the following comment on the Kitco Forum:

"With some forum members saying that they think gold will go into the $400 area, I feel compelled to write this post. Here are some facts about the charts:

1)Gold is at its 50 week moving average right now. Gold has bounced off this area of support many times over the past 3 years, and has never broken it. If gold breaks this line, then, and only then, would I be bearish.

2)The XAU has just this morning bounced off major gap support from the gap formed in mid March.

3)SLV is deeply oversold, and due for at least a relief rally.

4)The Euro is at a major area of support. This should keep the US Dollar in line."

Lets have a look at a chart to see how gold stocks faired. Below is a chart of the HUI, a major gold stocks index, with some comments I have taken from the Kitco Forum. The day in question is June 26, so please have a look at that date.

I don't mean to brag, but I made 4 points about the charts, as quoted above, and all 4 points turned out to be accurate. As well, as the above chart shows, if you had bought gold shares on June 26, you would have made a lot of money, and gold bullion itself bottomed at this time.

The point of this post is that you should never let your emotions, like fear, impair your judgement, and when you do detect fear amongst the public or the media, then it may be a sign that a bottom is place. I have seen this work time and time again. People are greedy at tops, and fearful at bottoms. Through various techniques, it is possible to exploit this fact of life.

I will have more about judging sentiment, and how to profit from it in further posts.

Monday, July 9, 2007

How Bullish Percent Works for The TSX

All charts courtesy of StockCharts.com

This post will hopefully help you add another tool in your technical analysis toolbox. So, what is bullish percent? Bullish percent refers to the percentage of stocks within a particular index that are on point and figure buy signals. Point and figure refers to a certain type of charting, and if you would like to learn more about it, I would recommend visiting StockCharts.com and clicking on their chart school tab.

I only recently got into point and figure charting, and StockCharts.com's section on this subject is where I got started, myself. They have written a better explanation than I probably could. Anyway, the good thing is that even if you have never heard of point and figure charting, you can still interpret what I am about to say.

So, if you refer to the above chart, you will see that on the very top we have RSI, and below that we have the BPTSE, the bullish percent index of the Toronto Stock Exchange. After that, we have a chart of the TSX itself, and, finally, on the bottom, there is an MACD histogram of the BPTSE.

The interpretation of this chart is quite easy. Simply notice that whenever the RSI of the BPTSE goes overbought or oversold, it represents good entry points for the TSX. I have highlighted some excellent buy signals in the above chart. Because the TSX is in such a bull market, I would put more emphasis on the buy signals than on the sell signals.

Another great way to use this chart is to pay attention to divergences between the MACD Histogram and the TSX. I have drawn blue diagonal lines on the MACD to illustrate this, and to show how they have some good sell signals, which could be used if you were daring enough to go short in this market.

This chart is very helpful in understanding movements in the TSX, but since the TSX and gold stocks are only mildly correlated, this chart may be of limited usefulness when it comes to finding entry points for that market. However, through ETFs, you can still play this market directly. The ETF that represents the TSX has the ticker symbol XIU.

In addition, there are bullish percent indexes for many other markets. If you would like the symbol for a particular exchange, send me an email, and I will get back to you.

Friday, July 6, 2007

Gold Rush 21 Video

If you are more into the fundamentals behind the gold bull, rather than the technicals, this video should be of interest. To learn more, I would recommend listening to Gold Seek Radio.

Wednesday, July 4, 2007

My Weakly US Dollar Chart

All charts courtesy of StockCharts.com

I am posting another chart of the USD index because I feel that it is at an important juncture. I believe that what goes on in the chart below will ultimately determine the future path of gold and gold stocks. I am also posting my weekly chart of the USD because it illustrates several interesting technical formations that can be learned from.

I have read many books on trading currencies, and what many of them say is that the Forex market is one of the most technically oriented markets there is. I have found this to be true, and I think my USD chart above lends some evidence to this claim.

The first thing to notice in the above chart is the beautiful head and shoulders pattern that formed in late 2005. The breaking of the neckline led to a precipitous decline that lasted until May 2006. Remember, as well, that during this time, gold was on fire until May 2006.

The second thing to observe in this chart is the giant triangle I have drawn with blue lines. The US Dollar has, like clockwork, been contained within these lines for more than a year. The bouncing off of these lines gave excellent entry points for the gold market. Since the triangle is close to reaching an apex, a move of great magnitude could be in the cards.

The third thing to notice is that the USD is close to long term support, as marked off by the red horizontal line. This red line is key. This red line goes back decades, and if it is ever broken, it will mark an all time low for the USD, and could lead to a major breakdown for the index.

In my opinion, the USD index will eventually break this long-term support, since the USD is in a powerful downtrend, and it never pays to buck the trend. However, on the daily chart, the USD is oversold, which means that another small bounce is likely, so I would not say that a break in the long term support is going to happen right away. I suspect that there cannot be a large move in gold until this weekly USD chart breaks down. Personally, I have half my money invested in XGD right now, and I think I'll keep the other half for when the USD breaks support.

Tuesday, July 3, 2007

Relative Strength and the TSX

Calculating relative strength is done simply by dividing the security you are interested in by a major index to see whether it is outperforming or under performing the index. In this case, the security that is of interest is XGD and the major index is the TSX, Canada's main stock index. Keep in mind that this has nothing to do with the RSI technical indicator that appears on the top of all my charts. That is something totally different.

Anyway, the chart below is a weekly chart of XGD divided by the TSX, so when the line is rising XGD is doing better, and vice versa. Beneath the relative strength line is a chart of XGD by itself. This chart generates excellent sell signals when the RSI of the relative strength line goes into overbought territory, and then leaves overbought territory. The reverse is also true when the RSI goes into oversold territory.

I have outlined some of these occasions with circles around the RSI and lines pointing down to the XGD chart to show how a bounce is usually imminent at these times. There are other times that this chart generated signals, but I thought 4 examples was enough to drive the point home. You see for yourself that signals generated resulted in a bounce in XGD 100% of the time.

One other aspect of this chart is that the deeper RSI goes into overbought/sold territory, the greater the resultant bounce in XGD. That being said, if you notice in the above chart, the RSI indicator presently is deep in oversold territory. This suggests to me that a very large upward move in XGD could be in the cards.

However, since these are weekly charts, signals generated take longer to manifest, and, in this case, RSI still has to leave its oversold range to trigger the signal. It will probably be necessary to wait a couple of months to really be able to tell if the signal generated here was a valid one.