A Technical Look at Silver Stocks Part 1

The month of September was an incredible one for all gold bugs out there. The XAU gold stocks index increased in value by 19.88% during this month. As well, gold bullion tacked on $69.90 an ounce, increasing 10.51%, and silver, for the first time in a while, rose by a faster pace, increasing in value by 13.81%.

As predicted, the US Dollar broke critical support at 80, and melted down after that point. The US Dollar is so weak that for the first time in 40 years, the Canadian Dollar is worth more than a green back.

With such a large increase over a short period of time, one might think that there is little profit potential out there. I do not believe this. Rather, I feel that this is the beginning of a much larger move. And more specifically, I think that silver has the most potential.

One of the reasons I believe this is because silver has, until recently, been lagging gold. The following chart shows a weekly chart of the SLV/GLD ratio. Basically, when this chart is falling, silver is under performing gold. When it is rising, silver is outperforming gold. The reason I am posting this chart again is because an RSI buy signal has just been triggered:



The other candle chart beneath the ratio represents silver bullion by itself. The two charts are similar, but we can get some additional insight by looking at this perspective. The main thing to take away from the above chart is that silver is "cheap" relative to gold.

Let's have another look at silver. Here is a daily candle chart of SLV, the silver bullion ETF:


The main point to note in the above chart is that SLV gapped up above its 200 day moving average. This is an incredibly bullish sign, in my opinion. In the event of any sort of correction, silver should find support along the blue rectangle drawn.

Finally, let's have a look at this week's commitment of traders chart:


The last time I posted this chart, I said that the commercials had reduced their short position to extremely bullish levels. Now that a few weeks have past since then, the chart is still looking very bullish. The large speculators are only now beginning to "wake up", as their position only this week is larger than the small speculators. The commercials can still increase their shorts by a fair amount before things start looking bearish.

A Technical Look at Silver Stocks Part 2

If you feel that silver will rise, then probably the best way to capitalize on this opinion is to buy the silver ETF. However, I prefer to hold silver stocks, as there can be more leverage in doing so, and that way I don't have to convert my Canadian Dollars into US Dollars to buy the ETF.

The problem with buying silver stocks is determining which ones to buy. Ideally, there would be a silver stocks ETF, but since there is not, I have tried to find stocks that have a close correlation to movements in the price of the metal.

Two such stocks are Silver Wheaton, and Pan American Silver. I have only selected these stocks because they seem to move along with the price of silver, which is all I'm looking for. Here is a chart showing Silver Wheaton on the top and the price of silver on the bottom:


As you can see, this stock tends to move with the price of silver. Let's have a closer look at Silver Wheaton:



As you can see in the above daily chart of SLW.to, the stock has formed a bullish island reversal pattern, in my opinion anyway. As well, notice that the RSI is not even close to being overbought, which cannot be said for most gold stocks.

However, this does not make this stock immune to a gold correction. Although not shown, the Gold Commitment of Traders chart looks much more bearish than the silver COT chart. Gold stocks can correct at any time now. These type of corrections are very difficult to time.

My plan is to keep holding the aforementioned silver stocks until their 9 day exponential moving average is broken on a closing basis. This method is much less stressful than attempting to get out at the very high of the move. Thanks for visiting this site.

The Bull Flag in the Monthly XAU Chart

The previous post discussed some significant breakouts in the Euro charts, and the post before that showed some major developments in the US Dollar chart. All of this was meant to be indirect bullish evidence in favour of gold and gold stocks. In this post, let's have a look at gold stocks directly.

In order to understand the upcoming chart, I would urge you to read the following two articles:

• Ripples, Waves, and Tides
• How to Use Volatility to Make Trading Decisions

These articles go over why the long-term gold stocks chart looks so bullish, and the reasoning behind this bullishness. Here is an updated version of the chart mentioned in those articles:



If you do not have time to read the aforementioned articles, here is a summary:

First, a bull flag has formed. Traditional technical analysis suggests that once prices breakout out of the flag, the subsequent rally should be approximately equal the height of the flag pole, which would take the XAU to the 210 area or more, in this case. The XAU has just broken out of the flag.

Second, the bollinger band width has just triggered a buy signal. It has touched the "launch pad" and bounced off. This is another long-term buy signal. You can see for yourself that whenever the bollinger band width reaches the launch pad level, a huge price movement follows.

Third, the indicator at the top, which is not stochastics, but based on volatility, has given a buy signal by crossing over 20.

Finally, the XAU is approaching levels not seen in the history of the index's existence. This can be viewed as a giant bullish triple top breakout. All in all, this all equates to a tremendously bullish situation for gold stocks. This does not necessarily mean that gold stocks will rise tomorrow, but it does mean that they will likely be much higher in the weeks ahead.

The Euro is Fueling Strength in Gold Stocks

In the last 5 weeks, the XAU has shot up in value by more than 40%. It is important to stay disciplined during these times, and to not let massive profits cloud your judgment. This post will look at why gold stocks have blasted off, and, more importantly, if it's still a good time to buy in a objective and disciplined manner.

As mentioned in the previous post, some of gold's strength is coming from the currency scene. I mentioned the US Dollar's weakness, but I did not mention the Euro's strength. Here is a Point and Figure chart showing the Euro breaking out of a bullish triple top formation. This chart goes back in time about 11 months.


On September 11th, I said that, "it [the Euro] has not yet broken through the overhead level of resistance. Once the Euro busts through this level, it will likely add more fuel to the fire for gold and gold stocks." This is exactly what ended up happening. This event is a bullish development for gold, and suggests more upside potential on the way.

Let's have a look at a weekly candle chart of the Euro just so that we can get another perspective.


The chart above goes back about 4 years, and it clearly shows the Euro breaking out of a bullish long-term double top formation. Since the Euro and the US Dollar tend to travel in the opposite directions, this is a major piece of bearish evidence for the US Dollar. This, in turn, is bullish for gold.

But perhaps you are still not convinced that the US Dollar is in trouble. Let's have yet another look at the Euro to make the case even stronger. The chart below is a monthly chart of the Euro. This chart goes back to 1993:


There are two major points in the above chart. Firstly, there is an enormous inverted head and shoulders forming, and second, the Euro has broken out of a triple top formation on this time scale as well. I feel that this extremely bullish for the Euro for the long term.

So, what does this all mean? It means that even though gold stocks have gone up 40% in a relatively short period of time, there is still a tremendous amount of upside potential left. There will be corrections along the way, and these corrections are going to hard to predict, but if you can hang on, you will likely be rewarded handsomely in the months and years to come.

The Reasons Behind Gold's Strength

Today, gold exploded past its old May 2006 high without the slightest bit of hesitation. I was anticipating at least a brief respite at this level, but gold's powerful momentum proved otherwise. You may be wondering why gold has been doing so well lately. I will try to explain why in this post.

I believe that much of the yellow metal's strength is being derived from a weak US Dollar. On a fundamental level, this has to do with the fact that the Fed was forced to lower rates. But since this site deals with the technicals, let's have a look at the US Dollar Index's daily chart:



The main point in the above chart is that the US Dollar has broken the psychologically important 80 level. As you can see, the currency has really fallen apart since the 80 level was breached. I have tried to illustrate the implications of this event in several articles written on this blog. For example, on July 25, 2007, I said:

"However, it's only a matter of time until this level [80] 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..."

Let's have a longer term look at the USD Index so that the gravity of the situation can be better understood. The following chart is a monthly chart, and goes all the way back to 1985:

For a larger view, please click on the image above.

As shown, the US Dollar index is currently trading at the lowest level of the index's existence. (In case you're wondering this index measures the US Dollar against a trade weighted basket of six other currencies, primarily the Euro, but also the Canadian Dollar, the Yen, the British Pound, the Swiss Franc, and the Swedish Krona. )

But back to the point, the fact that the US Dollar index could not hold 80 clearly shows that the currency has very little strength, and is something that is very bullish for gold in the long-term. I feel that this event is one the main factors that is driving gold's strength right now.

A Time for Caution for Short Term Traders

About this time last month, gold and gold stocks, as well as silver experienced what some might call a crash. From these lows, we have seen a spectacular rebound, with gold bouncing back almost 80 dollars an ounce. However, it is impossible for this rebound to continue at this pace forever. In this post I will present evidence that suggests that gold may be at a point where it needs to take a breather before moving higher again.

Firstly, gold, as represented by the gold ETF, GLD, is at its May 2006 high. I suspect that I am not the only one aware of this, and that there may be sell orders sitting at this level:


In addition, gold stocks, as represented by the XAU, are in a similar position. The XAU is at its May 2006 high as well. Furthermore, if you look closely, you will see that the XAU formed a shooting star candle formation today:



That being said, the trend, clearly is still up, so it may be wise to wait for additional confirmation before taking profits. If there is to be a correction, I suspect that it would be a minor one. This is because some long term developments have recently occurred that are highly bullish for the yellow metal.

The main long term development is that the US dollar has broken 80, and the other is that the Euro has broken through resistance (which I recently stated would likely happen in the article regarding the point and figure charts). I will talk about these developments in a much longer post on the weekend.

Silver May Begin to Outperform Gold Part 1

Over the last month, Gold and Gold stocks have done extremely well. In fact, the price of an ounce of gold has risen about $70 in the last month. With such a large move in gold, one would have expected silver to have moved aggressively higher, but, unfortunately, that has not happened. The following ratio chart shows that silver has been lagging behind gold since the beginning of last year:



Let's look at a longer term chart of this ratio to see what the longer term trend is. The following chart is a weekly candle chart of the ratio. The chart at the bottom represents XGD, a gold stocks ETF:



Interestingly, the silver/gold ratio tends to replicate the performance of gold stocks. This means that for the gold stocks bull market to remain healthy, we will need to see silver start to outperform gold. Luckily, that may begin to happen now.

The reason I believe this is due to how the Commitment of Traders Data looks like. In a nutshell, this refers to the data that the US Government collects on futures and options traders every week. Each Friday, a report is compiled and released to the public breaking down the futures and options positions of three categories of traders.

The three categories are: large speculators, commercials, and small speculators. The smart money is considered to be the commercials, since they usually produce the commodity, and have access to more information on business conditions than the general public. The commercials are usually net short when it comes to silver and gold, but it is wise to look for times when they are close to being long, or when their short positions are reduced. When this happens, it is considered a buy signal.

The large speculators are considered the dumb money. When they go extremely long, it is a signal to get out. On the other hand, when they are carrying a very small position, it is considered a buy signal. Large speculators tend to take the opposite position of the commercials.

The small speculators don't matter much, and they rarely give any meaningful signals. For more information on this, I would highly recommend a book called, Trading Stocks and Commodities with the Insiders, by Larry Williams.

Silver May Begin to Outperform Gold Part 2

We can take this data and graph it, so that it becomes much easier to interpret. What I have done is I have taken a chart breaking down the positions of each category, and fused it with a standard candle chart of the commodity. The following chart is of silver:


The areas with the red boxes represent times when the large speculators are at dangerously long positions. These correspond to the red areas of the candle chart above. The green areas represent times where the commercial traders have reduced their short positions as to give us a bullish signal.

Currently, the commercials, which, again, represent the actual producers of silver, are holding a very small short position. This means that they may know something that we don't. Furthermore, the large speculators have essentially abandoned silver. Their position is actually less than the small speculators, which, obviously, hardly ever happens.

Now, let's have a look at the Gold Commitment of Traders chart:



As you can see, the commercial interests have aggressively increased their short positions in gold, much more so than silver. This is essentially why I believe that silver will begin to outperform gold. Thanks for stopping by.

How to Solve Tough Trading Decisions

There are times when the decision to buy or sell a stock can be a very difficult one. Sometimes, there may be conflicting evidence for and against a decision occurring at the same time. This used to be a fairly frequent occurrence for me, and perhaps for you too. So let's have a look at the following quotation, which is, in my opinion, an intelligent way to solve this problem.

"My way is to divide half a sheet of paper by a line into two columns; writing over the one Pro, and over the other Con. Then during three or four days' consideration I put down under the different heads short hints of the different motives that at different times occur to me, for or against the measures.

When I have thus got them all together in one view, I endeavour to estimate their respective weights; and where I find two (one on each side) that seem equal, I strike them both out. If I find a reason pro equal to some two reasons con, I strike out the three. If I judge some two reasons con equal to some three reasons pro, I strike out the five; and thus proceeding I find at length where the balance lies; and if after a day or two of farther consideration, nothing new that is of importance occurs on either side I come to a determination accordingly.

And though the weight of reasons cannot be taken with the precision of algebraic quantities, yet when each is thus considered separately and comparatively, and the whole lies before me, I think I can judge better, and am less likely to make a rash step; and in fact I have found great advantage from this kind of equation in what may be called moral or prudential algebra."

So, who is responsible for this excellent quotation? You'd have to look at a rapidly depreciating 100 dollar bill to find out the answer.

Personally, rather than use a piece of paper, I write on a large white board with dry erase markers. I have found that this helps me tremendously in weighing the evidence for and against a decision, and helps me solve those extra difficult trading decisions.

Finally, you may have noticed a slight reduction to the frequency of new posts to this blog. This is mainly due to the fact that I have started a new day job, which consumes about 11 hours each day. I will continue posting as often as I can, and will have longer posts written on the weekends.

Euro and Gold Point and Figure Analysis

Today, gold stocks continued higher, after taking a breather over the last two days. At the same time, Gold Bullion also continued its ascent, adding on another 9 dollars.

I don't normally show Point and Figure charts, but I will in this post since there have been some interesting developments in these charts in last few days. Like all my other charts, these charts are from StockCharts.com.

If you'd like to find out more about this charting method, I would recommend reading this book. Anyway, the following chart is of Gold Bullion. It goes back to about February 2007, and it has a 3 box reversal. The main point of interest in this chart is the quadruple top that gold has just broken through, which is a very bullish pattern.



Because gold tends to move in the same direction as the Euro, the Euro's point and figure chart is currently exhibiting a similar development. However, as shown below, it has not yet broken through the overhead level of resistance. Once the Euro busts through this level, it will likely add more fuel to the fire for gold and gold stocks:


If you find these type of charts useful, then you may also enjoy this blog. And on the topic of currencies, the USD has, at long last, broken the 80 level. At this point this has not led to a spectacular washout in the currency, but I feel that it easily could.

Although it's impossible to tell for sure, there could could be a large number of stops, holding billions of dollars, sitting just below current levels. Thanks for stopping by.

How to Use Volatility to Make Trading Decisions

In the last post to this site, the author of the excellent blog, HeadlineCharts, made a comment regarding the Bollinger Bands of the XAU monthly chart. I was going to respond to that comment, but instead decided to write an entire post on the subject, since it was such a good point.

The premise behind this upcoming chart is that periods of low volatility precede explosive moves. On the other hand, periods of high volatility tend to come at times where the market is tired, and needs to take a breather for a while.

The following chart is a monthly chart of the XAU:



The indicator at the very top of the chart is an indicator that you likely have never seen before. I call it a compound indicator, since it is in fact an indicator on an indicator. It is taking the stochastic of the %B indicator.

This indicator dances to a completely different drum than most others since it is based on volatility and not price. However, it can be read just like stochastics can. This indicator currently is on a buy signal.

The indicator at the bottom represents the Bollinger Band width. By clicking on the above image, you will see that this indicator tends to fluctuate between 20 on the low end and 100 on the high end. Moves down to the 20 area tend to be good long term buying opportunities.

I remain extremely bullish on gold stocks right now. I'm just hoping that they relieve some of their short term overbought condition before moving higher again. But, again, the long term picture is more bullish now than it has been for a long time.

Gold and Dollar Update

As you probably know, gold and gold stocks went ballistic yesterday. The HUI Gold Bugs Index was up by 6.61%, and Gold Bullion increased by about 13 dollars. Today, however, was not as promising. The gold bullion ETF, GLD formed a bit of a shooting star on the daily chart:



In addition, the entire candle is outside the upper bollinger band, and the RSI is getting uncomfortably overbought.

Notice that the high for the day was 70.00, which is round number resistance. But let's not just rely on technical indicators. Let's look at the intermarket picture.

The US Dollar is, once again, at the 80 level. This has proven to be strong support in the past. I exited my gold positions today, and will only re-enter if the 80 level is broken. It will be interesting to see what will happen on Monday.

60 Minute Gold Charts and Gaps

Between August 24th and August 27th, I have posted bullish evidence in favour of gold stocks and the TSX. One of these posts was in reference to an island reversal that had formed in the gold stocks ETFs. Let's have a closer look at what unfolded by observing a 60 minute chart:

(you should hopefully be able to click on the image for a larger view)

What I find interesting is that the gap up was filled by only a 1 cent differential. This is because gaps tend to act as support and resistance. Once the gap was filled, it was all systems go for the gold bulls.

I have experienced this exact pattern before in October 2006 when I was trading Agnico Eagle Mines stock. The similarities between what happened above and what is shown below is uncanny:

Keep in mind that the above chart is a 60 minute chart again. This price action took place in the fall of 2006. Although not an island, please notice how the stock gaped up, filled the gap by a 1 cent differential, and then exploded higher. This is exactly what happened in the first chart posted.

If you find this analysis useful, then please tell your friends about this site. You can click on a little envelope below to email an article to other people. I cannot continue blogging unless more people visit this site.

A Quick Euro Update

One of the forces behind the recent strength in gold stocks has been a rising Euro.  This is because a rising Euro puts pressure on the US Dollar, which bolsters gold.  At this moment, the weekly Euro chart is at an interesting juncture.  

As shown below, the Euro is at the apex of an ascending triangle.  This means that it must break support or resistance within the next couple weeks.  The direction of this breakout will determine the future course of gold prices.





For a combination of technical and fundamental reasons, I feel that the breakout will be on the upside for the Euro.  One event that may have a large impact on currency values will be when The Fed meets on September 18th.  

Some analysts believe that they will cut rates by a quarter point or a half point, but some believe that they may cut rates by three quarters of a point.  That would certainly give the Euro some direction.

Ripples, Waves, and Tides

The month of August has come and gone, so I thought I'd show a monthly chart of gold stocks to see how this month affected the big picture.

I posted a monthly chart of the XAU a few weeks ago, and I indicated that a bull flag had formed. This pattern has not yet come to fruition, but it has not been negated either. You'll see what I mean in this following chart:



Keep in mind that this chart goes back to the 1980's, and each candle line represents an entire month. The candle furthest to the right represents the month of August. What is interesting is that prices dipped far below the confines of the bull flag "intra-month" but closed within the pattern by the time the month came to an end. Since I only consider closing prices, this means that the pattern is still intact.

You will also see in the above chart a circle made on the MACD histogram. I feel that this circle represents the date the the gold bull market was born. As you can see, the histogram has never fallen back below the zero line since that date. This shows that the primary trend is still up.

As you may know, Charles Dow, who was one of the founding fathers of technical analysis, stated, "The market is always to be considered as having three movements, all going on at the same time."

These three movements could be compared to tides, waves, and ripples of an ocean.

I feel that the monthly chart above represents the tide. Daily and Weekly charts represent the waves, and short term intra-day charts represent the ripples. Since the primary trend, or tide, is still up, I feel that this will have a positive effect on gold stocks for the months and years to come.