Looking at Inverted Charts and Psychology

One thing that I have often been guilty of when trading is focusing on all the bullish aspects of a chart when I am long, and concentrating on all bearish aspects of a chart when I am short. I do not do this intentionally; it happens to me, and most other traders, subliminally.

But maybe Mark Douglas, author of "Trading in the Zone" can explain it better than I can:

"When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the potential to be threatening has the potential to be blocked, distorted, or diminished in significance..."

Because of this fact, I try to look at my charts from the opposite perspective, and I do this by looking charts upside down. For example, when I trade the TSX, I can look at two ETFs, one that does twice the performance of the TSX, and the other that does twice the inverse of the TSX:

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These charts are basically mirror images of each other. When one chart is overbought, the other is oversold, and so on. Currently I am long the TSX, but I will also keep an eye on the short TSX fund just to see things in another perspective.

I will ask myself if I would be satisfied holding the short fund right now. I will try to look and see if there is anything positive about the short fund. If so, then perhaps holding the long fund may not be such a good idea.

36 Rules for Trading Success

I have recently been reading a book called "How to Make Profits in Commodities" by WD Gann. So far, this book has been a really tough read, and it's been hard to extract much meaningful information from it.

I may discuss more about this book in a review at a later date. In the meantime, here are the main points of the book that I was able to extract:



The 24 rules:

1. Never risk one tenth of capital in one trade.
2. Always use stop loss orders.
3. Never overtrade.
4. Never let a profit run into a loss. (move stops up)
5. Do not buck the trend. (refer to my trading with the trend section)
6. When in doubt, get our or don't get in.
7. Trade only active stocks.
8. Equal distribution of risk in 4 or 5 stocks.
9. Trade market order.
10. Do not close your trades without a good reason.
11. Accumulate a surplus
12. Never buy just to get a dividend.
13. Never average a loss. (this is key)
14. Never get out/in of the market because of impatience or anxiety.
15. Avoid taking small profits and big losses. (easier said than done)
16. Never cancel a stop loss order after you placed it.
17. Avoid getting in and out of the market too often.
18. Be just as willing to sell short as you are to buy.
19. Never buy/sell just because the price is low/high.
20. Wait till the stock is very active and has crossed resistance levels before pyramiding.
21. Select stocks with small volume of shares outstanding to pyramid on the buying side.
22. Never hedge one stock by another.
23. Trade with a plan and do not get out without a definite indication of a change in trend.
24. Avoid increasing trading size after a long period of success.



The 12 rules:

1. Determine the trend
2. Buy at single, double and triple bottoms
3. Buy and sell on percentages
4. Buy and sell on 3 weeks' advance or decline
5. Market moves in sections/waves
6. Buy or sell on 5 to 7 point moves
7. Study volume to determine change in trend
8. Study time factor and time periods to determine change in trend.
9. Buy on higher tops and bottoms
10. A change in trend often occurs just before or after holidays.
11. Buy on a second reaction at a higher bottom.
12. Price gains in fast moves does not last very long.

Some Very Basic Elliott Wave Analysis for Gold

So, this is the first post where I'll be talking about Elliott Wave Theory. The reason it's the first time is because I'm not an expert on this topic, and there are probably other sites that can talk about it with much more expertise than me, to be frank.

Nonetheless, I do feel qualified to make the statement that gold stocks almost always correct in three waves. Corrections usually begin with one sharp thrust down, followed by a counter trend relief rally, and then a finally third wave down.

Below is a daily chart of the HUI, a gold stocks index:



One lesson that I have learned from the above chart, and, by the way, I've had to learn this lesson the hard way, is that it is often a mistake to try to dive into gold stocks on the B Waves. It is much safer to start loading up after the C wave has exhausted itself.

If the past repeats itself, or at least rhymes, then we should be due for a rather large upward thrust starting now. In my opinion, we have just completed Wave C, and, if you look at the above chart, that seems to give the green light for the gold stocks bulls.

An Island Reversal in The Gold Stocks Chart

So, this week was an excellent week for gold stocks. The XAU was up almost 8% for the week, Gold Bullion tacked on about 12 bucks, and, as forecasted on August 19th, the Euro rose while the US Dollar fell.

Gold stocks were so strong that one index I follow, the S&P/TSX Global Gold Index, formed a powerful morning star formation. I explain why this pattern is so reliable and profitable here. You really do have to look at the chart carefully, or else the pattern can slip by you.


In the above daily candle chart, you can see that every island that has formed so far, has led to a major change of trend. Although this island reversal we have just experienced does not guarantee a change of trend, I think it puts the odds strongly in our favour.

One other thing to note, these island reversals would never be visible on the XAU or HUI charts, since gaps rarely appear on these charts. To see these patterns, it is better to look an ETF, such as XGD, or GDX.

A Buy Signal is Triggered for the TSX

In this post, I'm just going to show the buy signal that has developed in the TSX Bullish Percent Chart.

I actually posted this chart a little over a week ago, and I showed that it was getting close to giving a buy signal. However, this statement proved to be premature, as one should always wait for confirmation, which, in this case, involves the RSI crossing back into non oversold territory. The good news is that this confirmation has just arrived:


As you can see in the above chart, when the RSI dips into oversold territory, and then subsequently leaves oversold territory, a buy signal is generated. The last three signals have proven to be extremely profitable.

Please click on the chart to see a larger image. Also, you can see a live version of this chart for free at all times by going to my public chart section, which can be found by clicking on the link in the top right hand corner of my site. This chart is located on page number 5.

If this signal turns out to be accurate, the TSX will likely be at much higher levels in the weeks ahead. If you agree or disagree with my analysis, I would like to hear from you. Thanks for stopping by.

Intermarket Analysis of Gold Stocks

One of the advantages that comes with tinkering with charts for hours each day is that I occasionally stumble across something really interesting. Although I was somewhat hesitant to release this post, I have decided to anyway, as a token of my appreciation to the 1000th unique visitor to my site, and to those who have written comments on my blog.

This chart relies on some principles of intermarket analysis, and is related to another technique I wrote about here. What my technique does is divide the Dow Jones Industrial Average by the Dow Jones World Stock Index. So, what does that have to with gold?

This chart is related to Gold since it can detect movements of the US Dollar, and I'll explain how it does that now. When investors feel that the US Dollar is going to start falling, they will be more inclined to sell US Stocks, which are denominated in US Dollars, and reposition themselves in Foreign stocks, which are denominated in some other currency. The chart below is able to observe this process:



In the above chart, the green area represents the ratio, the middle area is a MACD Histogram of the ratio, and the CandleChart on the bottom is a chart of the USD Index. The way to utilize my chart is to look for MACD crossovers as buy or sell signals for the US Dollar.

What is amazing is that the MACD Histogram in the above chart is actually a leading indicator. Let's look at a MACD Histogram of the US Dollar itself, and you will see that when it crosses the zero line, it is usually too late.


The problem with the MACD Histogram above is that it is too slow. It is, like all technical indicators, a lagging indicator. It is using price A to help forecast price A, which can only go so far. This is why I feel the first chart is superior.

Naturally, since the US Dollar and Gold Stocks trend in the opposite directions, if we reverse the intermarket chart, we can use it to forecast movements in Gold Stocks:



So, just to recap what is going on here, in the above chart we are dividing foreign stocks by American stocks, so that when the green area is increasing, foreign stocks are doing better. When foreign stocks are doing better that means investors are hesitant to hold US Dollar denominated stocks in their portfolio, since they are anticipating a US Dollar correction. When the US Dollar corrects, gold rises, and gold stocks rise.

Buy and sell signals are generated when the MACD histogram crosses over, or when RSI is oversold/overbought. The last three overbought sell signals have worked extremely well.

Finally, you can try this link to build your own free charts. So, I hope this post makes sense to you, and thanks for visiting this site.

A Weekly Look at Gold Stocks

After large corrections like the one we just had, I always look at the longer-term charts to get a better perspective and to assess the damage. Even though the selling in Gold Stocks became severe at times, I think there was no long-term technical damage to the weekly charts.

Here is a weekly chart of the XAU:


Many gold analysts, including myself, have been saying that gold stocks were winding up for a powerful breakout that would take prices much higher. In the above chart, you can see the blue triangle that once contained this coiling price action. Obviously, this pattern is no longer valid, but I have drawn red lines to outline a new pattern, which appears more like a trading range. Basically, the bullish triangle has morphed into a more neutral sideways range.

One positive aspect about the above chart, is that the XAU is at a quadruple bottom. Also, notice the long lower shadows on the weekly candles as the price approaches the lower red line. This indicates that bulls have come in and scooped up gold stocks at discounted prices when prices descend to this level.

In a previous post, I said that GDX was at a quadruple bottom, and this observation did nothing to halt the fall in prices, so you may be dubious about this quadruple bottom. That would be a fair reaction, but remember that these charts shown are weekly charts, and the GDX chart was a daily chart. I have always found longer term charts to be much more reliable.

Finally, let's have a look at one more chart:


The above chart is of the ETF that mimics the S&P/TSX Global Gold Index, ticker symbol XGD. It is in more or less the same shape as the XAU chart. One thing you probably noticed is the quadruple bottom as well.

This happens to be the only way I play gold stocks, and I think it's good a vehicle for doing so. The only thing is that you have to keep an eye on the Canadian Dollar if trading this, since it really affects its performance.

A Technical Look at the Euro Index

In a couple of recent posts, I pointed out that I was hoping to see the Euro bounce off its long-term rising support line. That appears to be what is happening right now. In terms of gold and gold stocks, I would view this as a positive development, since a rising Euro will put pressure on the US Dollar.


In the above weekly chart of the Euro, notice that the currency broke support intra-week, but held it by the close on Friday. So far, I feel that this is a positive sign. Let's have a look at a daily chart of the Euro:



In this chart, the daily Euro price action is on top, and the red chart at the bottom is GDX, which represents gold stocks. Interestingly, every time the Euro has dipped into oversold territory, and then has left oversold territory, it has marked a buy signal for gold stocks.

Furthermore, if you look at the area I have circled, you will see what is know in the West as an island reversal pattern, or in Candlestick charting, a morning star formation. This is relatively rare pattern, and I think adds another piece of evidence to a Euro bottom.

Profiting From Losses

If you thought that the level of volatility was out of control for the Dow and S&P, you should have a look at the Canadian markets if you have not done so. Yesterday, I got stopped out of all my positions on the opening. The TSX in Toronto was down about 200 points at this time, but a few hours later it was down nearly 600 points.

If you think that sounds bad, the Venture Exchange, in Vancouver, which trades mainly smaller capitalization mining stocks, has lost almost 30% of its value in the past couple of weeks:



I did in fact start shorting stocks starting July 23, and made some nice profits, but I made the costly error of covering my shorts, and then a couple of days later going long. The root cause of this error was overreacting to potential reversal signs, and not waiting for confirmation.

For example, in a previous post, I observed the perfectly shaped hammer that had formed in the TSX chart. Now, there is nothing wrong with doing this, but I should have been more cautious, and I should have waited for confirmation the next day, which never came.

Incidentally, the same scenario appeared in the charts yesterday, except in the Diamonds ETF. A text-book hammer formed right on the 200 day moving average. This is a bullish combination, however, I would not jump the gun and dive in. Let's wait for some confirmation this time:


I hope that you can learn when my analysis turns out to be correct, and when it turns out to be incorrect. I also benefit greatly from this site, since I can go back, and see exactly what I was thinking several weeks ago, which helps me learn from what I did right and what I did wrong. I think this is a win-win situation.

Finally, here is a daily chart of the US Dollar Index:


I'll let you be the judge, but the main thing I noticed is that the currency is right on R2, which I labeled on this chart about a month ago. As well, notice that the Dollar is entering overbought territory. I'm still going to wait in cash for a bit longer though, since I still want to see more confirmation that the USD will bounce off this line. Good luck investing.

Gold Stocks Will Prevail in the Long Run

Over the last week, I have posted evidence suggesting that gold stocks have bottomed out. Despite my best efforts, my posts have turned out to be incorrect, and I have lost money because of this. Nonetheless, I still feel that it would be imprudent to sell at this time.

Here is a chart of GDX, the gold stocks ETF:




The main thing is to keep calm, and to continue to look at the charts objectively. One aspect I'm interested in seeing is how the weekly charts finish off this week. I'll be looking to see if the Euro holds the support line I was talking about. This test will be key. I'll have a longer post once the week finishes up. Best of luck.

Gold Stocks Are on Sale

I have already made one post today, so I'll keep this one short, and let the charts do the talking. I will say, that if you are like me, and you own gold stocks, then you are probably in a bit of pain right now.

This post is meant to show that it would probably be imprudent to sell gold stocks at this time. Here is a daily CandleVolume chart of GDX:


Next, let's have an update on the US Dollar. The US Dollar Index closed at 81.49, which is a penny shy of the 81.50 resistance level. I really don't think that this is a coincidence:



Finally, in the post I made this morning, I said that the Euro was close to its long-term upward sloping support line. Well, now it's touching it, and this should provide some relief to gold stock should this support hold. If this support fails to hold this week, I will be forced to sell my gold stocks position.

Finally, here is a daily chart of the Euro, and notice the gap support:


If you agree or disagree with my analysis, then please do write a comment. I would love to hear from you. Thanks again for looking at my blog, and good luck trading.

The Euro Versus the US Dollar

When it comes to charting, very few things are known with certainty. But I do know one thing for certain, and that is either the US Dollar or the Euro will have to break support soon. It's mathematically impossible for this not to happen. You'll see what I mean when you look at these charts:


The chart above is a weekly chart of the Euro. The Euro has been quite weak lately, but at least it is close to the upward sloping trend line. For me to remain bullish on Gold Stocks, the Euro must find support along this line.

But back to my point, if the Euro continues to grind higher, it will have to push the US Dollar lower, and the US Dollar is right at support near 80:



Basically, what I'm trying to say is that if the Euro holds support, then it will cause the US Dollar to break support. Conversely, if the US Dollar continues to bounce off 80, it will cause the Euro to break its support line. Either way, something has to give.

Because the Euro is in a major uptrend, and the US Dollar is in a major downtrend, I would bet that the US Dollar will be the one breaking support. Thanks for visiting my blog.

Resource Stocks Hammer Out a Bottom

Despite the tremendous volatility this last week, I think that gold and gold stocks held up very well. In particular, I thought gold's performance on Friday was outstanding. The metal was up almost 12 dollars, while everything else was in the red.

You may have read about this, but the Fed added about $38 billion of liquidity to the system on Friday, which was supposed to help stabilize the markets. So, imagine that, $38 billion of money just created out of thin air. That's more than $125 for every man, woman, and child in the United States. When the Fed adds liquidity to the system, it means that there is more paper money floating around to chase a limited amount of gold, and this is why gold rose yesterday.

Anyway, back to the charts. I feel that gold stocks have bottomed out, and I have made some annotations in the following daily chart of the HUI to support this argument.


Furthermore, I feel that the TSX has bottomed out. The chart below shows an ETF that I just recently became familiar with, and this ETF does twice the daily movement of the TSX. So, if the TSX goes down 2%, this ETF will go down 4%, and vice versa.


The main thing to notice is the text-book hammer candlestick pattern that formed on Friday. I think that this is a powerful piece of evidence that the TSX has bottomed. To be more specific, I expect much higher prices for gold stocks, and the TSX in the weeks ahead.

If you were curious about the ETF that I mentioned before, then this table might be of interest to you. There are many other ETFs that this company provides, and this table summarizes them. In my opinion, these ETFs are a great idea, as they can save you money on margin costs, and allow you to easily go short, which can be used to protect your portfolio.

HORIZONS BETAPRO ETFs	TICKER	INDEX	DAILY OBJECTIVE	INCEPTION DATE
HORIZONS BETAPRO S&P/TSX 60® BULL PLUS ETF	HXU	S&P/TSX 60 INDEX®	200% OF THE UNDERLYING INDEX	JANUARY 2007
HORIZONS BETAPRO S&P/TSX 60® BEAR PLUS ETF	HXD	S&P/TSX 60 INDEX®	200% OF THE INVERSE OF THE UNDERLYING INDEX	JANUARY 2007
HORIZONS BETAPRO S&P/TSX CAPPED FINANCIALS® BULL PLUS ETF	HFU	S&P/TSX CAPPED FINANCIALS INDEX®	200% OF THE UNDERLYING INDEX	JUNE 2007
HORIZONS BETAPRO S&P/TSX CAPPED FINANCIALS® BEAR PLUS ETF	HFD	S&P/TSX CAPPED FINANCIALS INDEX®	200% OF THE INVERSE OF THE UNDERLYING INDEX	JUNE 2007
HORIZONS BETAPRO S&P/TSX CAPPED ENERGY INDEX® BULL PLUS ETF	HEU	S&P/TSX CAPPED ENERGY INDEX®	200% OF THE UNDERLYING INDEX	JUNE 2007
HORIZONS BETAPRO S&P/TSX CAPPED ENERGY INDEX® BEAR PLUS ETF	HED	S&P/TSX CAPPED ENERGY INDEX®	200% OF THE INVERSE OF THE UNDERLYING INDEX	JUNE 2007
HORIZONS BETAPRO S&P/TSX GLOBAL GOLD BULL PLUS ETF	HGU	S&P/TSX GLOBAL GOLD INDEX®	200% OF THE UNDERLYING INDEX	JUNE 2007
HORIZONS BETAPRO S&P/TSX GLOBAL GOLD BEAR PLUS ETF	HGD	S&P/TSX GLOBAL GOLD INDEX®	200% OF THE INVERSE OF THE UNDERLYING INDEX	JUNE 2007

Technical Analysis of the US Dollar

If you are interested in understanding where the price of gold is headed, it is essential to always keep an eye on the US Dollar. Since the US Dollar is at a critical position, it is especially important to keep an eye on it now.

As mentioned in my previous post, the US Dollar is at a major area of support. To my disappointment, the currency has bounced off the 80 level for a second time, and I feel that this is why gold stocks struggled yesterday.


Nonetheless, most of my charts are still gold bullish, and I still feel that the 80 level will be broken soon. In my opinion, when the 80 level is broken, there may be some panic selling in the US Dollar, which may lead to some explosive moves in gold and silver.

If your thoughts are on the same lines as mine, then this next chart may be of interest to you. This chart shows a new ETF that may allow investors to capitalize on a fall of the USD:




This exchange traded fund invests in futures that are short the US Dollar against various other currencies, mostly the Euro. I really like the idea of currency ETFs, and I hope they gain popularity. One ETF that has been around for longer, and is more popular right now is the Euro Trust ETF, ticker symbol FXE.

The only issue I have with the ETF chart above is the lack of volume. Hopefully this fund will gain more popularity as time passes. More information about this fund is found here.

I should also remind you that this blog is for educational purposes only, and that there are never any certainties, only opportunities.

Another Look at Gold Stocks

Everyday, I analyze 70 charts that are, in one way or another, related to the gold market. Out of these, the overwhelming majority are reading bullish. I'll show one example of just one of these bullish indications.

The first chart shows the relationship between gold and aluminum. I encourage you to check out this link, so that the following chart will make more sense.



As you can see, the last 4 signals this chart gave proved to be accurate. The above chart is currently on a buy signal. Only time will tell if it can make it 5 for 5.

However, out of the charts I look at, there is only one that is causing me some concern, and that chart is of the US Dollar.


The problem is that the US Currency is right on support. I can't imagine gold rallying significantly until this support is broken. However, if it is broken, it would be unimaginably bullish for gold and gold stocks. Because the US Dollar index has never broken this level of support in the history of its existence, it would be a major milestone, and a triumph for all gold bulls.

The TSX and the Canadian iShares ETF

Today was one of those rare days where the American markets were open, but the Canadian markets were closed. However, it is still possible to determine how the Canadian markets would have done, had they been open. This post will be about how to synthetically determine the value of the TSX in these occasions.

All you do is take the Canadian iShares ETF, which trades in New York, ticker symbol EWC, and divide that by what the Canadian Dollar is trading at. The Canadian iShares holds a basket of stocks that represent the entire Canadian economy, and is weighted similarly to the TSX.

The blue chart is the iShares divided by the Loonie, and the red is the TSX itself.


I think it is clear that both charts appear exactly the same in all respects. So, let's say that at the close on Friday, you buy $10,000 worth of stock in Canada, and right now, today, you want to know what it would likely be worth. Well, notice at the very extreme top right of the chart, it says, -.55%.

That would mean that your Canadian stocks would have a real value of approximately $9,945 tonight. You can apply the same procedure to any individual stock as well, as long as it is traded in both Canada and the United States. I hope that makes sense, and thanks for visiting my blog.

The 1987 Stock Market Crash and Gold

Since we are nearing the 20th anniversary of the October 1987 stock market crash, I started thinking about how the crash affected gold and gold stocks. The following charts were meant to satisfy my own curiosity, but I will post them on here, since you may find them as interesting as I did.

Firstly, lets have a look at the Dow Jones Industrial Average on the date of the crash, just so that we can put things into perspective.


I think the above chart needs no explanations, so let's get right into the gold chart, to see how it held up amidst the chaos.



As you can see, Gold held up very well during the panic, and actually went up, as investors fled into this safe haven metal. This is traditionally what gold has been viewed as, even though in the last year the stock markets and gold have risen and fallen together.

Also, did anybody notice that gold was up more than $24 last week, even though the markets kept on falling. The relationship between stocks and gold may be reverting to their more traditional role.

Finally, lets have a look at how Gold Stocks held up during the stock market crash:




To my surprise, Gold Stocks did quite poorly during this time. I suppose during this time of intense fear, Gold Stocks got thrown out with the bath water. So, in the end, it seems like there might be some value in holding assets other than stocks in one's portfolio.

Monthly Market Sector Performance Review

The excellent website, StockCharts.com, has a section called PerfCharts, where you can create charts that look like the one below. The purpose of these charts is to look at which market sectors are outperforming or under performing. The chart below is the PerfChart that I like to look at.


This chart looks back 1 month, and tells you what sectors have been doing the best, and, as you can see, Gold Bullion has done the best over a 1 month time frame. The worst performing sector was the S&P 500. Please refer to the X axis on the bottom of the chart to see what the bars represent.

I feel that Gold is now starting to attract some nervous money that has recently left the stock market, and this is also why Gold Stocks have faired reasonably well. However, since Gold Stocks are still stocks, they did sustain some damage from the general market fall.

Even if you do not have an account with StockCharts.com, you can still create your own PerfCharts. You can also look at my chart or create your own by clicking here.

Gold Stock Market Sentiment

The other day, I joined a forum that discusses the fundamentals and technicals behind the gold market. One thing I noticed, at the bottom of the page, it said "Most users ever online was 1,162, 05-06-2006." So, that got me thinking, and led me to look at a gold chart at that date. Below is the chart I was looking at, and I have circled the date in question.



Interestingly, the date that had the most traffic, the date where the public was most interested in learning about investing in gold, was almost at the exact top of the market. This proves, once again, that the general public is usually at the wrong place at the wrong time.

I also remember reading a newspaper article at the beginning of May, 2006 that showed how people in Toronto were lining up outside coin stores to get their hands on some silver. This was when silver was at about $15.50 an ounce, but a month later it was $9.50 an ounce.

Anyway, in terms of this site, I'm trying a new form of advertising. I've had a lot of difficulty with the ads I was previously using, so I'm giving these guys a try. The ads appear as double underlined words within my articles. Words that have a single underline are not ads, and are links to my other articles. If anybody finds these annoying, please send me email, and I will consider removing them. Thanks.

TSX and S&P 500 Hold Critical Support

The TSX had a rough day yesterday, and dropped all the way to major support, but the good news is that no major support was broken. This means that the TSX must not fall today in order for me to remain optimistic. Here is an update of the TSX chart.


It seems to me that I was not the only investor looking at this level of support. Notice how the key level was penetrated intraday, but actually held by the time the market closed.

I don't normally look at the next chart all that much, but I feel that, yesterday, something rather significant occurred. The next chart is a daily chart of the S&P 500 ETF. Notice how the bears pushed prices beneath the 200 day moving average, but then the bulls managed to wrestle prices back above this key area of support.

Furthermore, notice the extremely heavy volume that has taken place during the last week. It has been my experience that volume patterns, such as the one shown below, tend to preceed bottoms.


I think these two items represent bullish developments for the stock market, and, as such, I'm starting to scale back into some gold stocks now. So, best of luck, and thanks for stopping by.