Saturday, August 25, 2007

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.


Anonymous said...

Hi Danny,

I don't think these examples fit the definition of island reversals. Certainly not the last area you circled in August. The gap up would need to gap up to the price point of the gap down to meet the definition of an island reversal, and the gap also appears to have been closed. If you look at GDX there is no island as the gap was closed and you can see a bearish engulfing signal on the 23rd.

Danny Merkel said...

Hi there,

Thank you for your thoughts. One thing I dislike is when technical analysts try to define patterns by rigid rules that are set in stone.

What is more important is to understand the pyschology behind the patterns, and to make profits from this.

The only way to determine what is right is by determining what has made money, and these patterns have made me a lot of moeny in the past.

Perhaps you will be right, and the bearish engulfing pattern you pointed out may lead to lower gold stocks prices.

Time will tell what is right and what will make money.

Anonymous said...

Dear anonymous at 11:40am,

9 seconds and 49 seconds