Wednesday, October 31, 2007
An example of this happened on Monday, where XGD formed a text-book shooting star, while GDX closed very strongly that day. GDX gapped down on Tuesday, and closed about 2% lower that day.
I was browsing StockCharts.com's public chart list the other day. One of the lists that I appreciate there is from a man named Robert Cote. He had an interesting chart of index that I was previously unfamiliar with called the Dow Jones United States Precious Metals Index. The ticker symbol for this index is $DJUSPM. Below is a weekly chart of it:
Notice that, as shown by the yellow rectangle drawn, that resistance turned into support, and that support later flipped to resistance again. (For anybody interested in drawing semi-transparent zones when annotating charts, you press the CTRL botton on your keyboard while drawing shapes. It took me 6 months to figure this out.)
Anyway, beneath the candle chart is a new indicator. I attempted to explain the mathematics behind this indicator here. In a nutshell, it simply tells you how far, on a percentage basis, the price of a security is from its 50 period moving average.
In general, stocks tend to regress toward the mean, and when prices become very distant from the 50 period moving average, it indicates that there is risk in holding that stock. In the above chart, when the index becomes 30% higher than the 50 week moving average, that seems to show that prices have gone up too far too fast, and a correction is due.
What I like about this indicator is that it can give you overbought and oversold readings, similar to the RSI, but the mathematics behind it are completely different from the RSI. Therefore, if the RSI were to confirm this new indicator, that would be a more powerful signal than say the RSI confirming a Stochastics signal.
By the way, if you scroll down, you will find a box to enter in your email address. By doing so, you can receive an email notification whenever there is a new post to this site. Since I do not post on a regular basis, this can save time by avoiding continually checking in to see if there is any new material. Thanks for visiting.
Saturday, October 27, 2007
With gold rising so quickly, you may think that it would be insane to short gold stocks, but then again, is gold really rising? I feel that much of the yellow metal's recent rise can be attributed to a falling dollar and not to rising gold. In other words, an ounce of gold is worth more dollars, but those dollars are, in turn, decreasing in value by a similar rate.
This is evidenced when looking at the value of gold in a currency that is not currently being debased, such as the Canadian Dollar. The chart on the bottom shows that Canadians holding physical precious metals, such as myself, have not made money in the last 2 months.
Although holders of gold have not seen impressive profits when denominated in currencies other than the US Dollar in last couple months, this has not been the norm since the gold bull market began. The trend for gold is up overall in all currencies when looking at the long term picture, as illustrated in the following chart.
As you can see, Gold has done quite well when denominated in several major world currencies over the long run. This is shows that the bull market in gold is healthy and that gold in real terms certainly is rising.
Furthermore, in addition to trading gold stocks, I feel that one should allocate some money in a core position of physical gold or silver, and to hold that position regardless of what the charts tell you. In a bull market, the best strategy is a buy and hold strategy.
Saturday, October 20, 2007
In the last post, I said that gold stocks were looking weak, and right now I still feel that they are looking weak. Some of this weakness has to do with the fact that equities in general are declining, and gold stocks, being stocks, will continue to fall as the markets fall, as Paul mentioned in a comment in the previous post.
When times get tough, it is certainly better to be in the metal rather than in gold stocks. You know, gold actually rose about 11 dollars this week, and paradoxically, my short gold stocks position made over 5% this week.
Anyway, let's have a look at some of the intermarket forces at work that may be driving global stock market weakness.
The following chart shows the Japanese Yen divided by the Australian Dollar. This relationship helps illustrate the health of what is called the carry trade. This refers to when traders borrow Yen at low interest rates, and convert it into a higher yielding currency in order to make profits.
Some traders go a step further and invest the higher yielding currency into the stock market for additional profit potential. An example of this would be a trader borrowing Yen at a rate of interest of 0.5% and buying Australian Dollars, which yields 6.5%, for an easy 6% profit. The trader then may invest the money in Australian stocks.
Since the trader borrowed Yen he will have to pay it back. If the Yen remains flat or decreases, the trader will hold his position. However. if the Yen starts appreciating rapidly, the trader will be inclined to sell his Australian stocks, take his dollars, and convert them back into Yen, before it appreciates anymore.
The above chart shows the TSX in red, which is similar to the Australian Stock market, and as you can see, when the Yen increases relative to the Aussie, the carry trade unwinds, and the TSX plummets. What happens in the TSX is also experienced by other markets world wide.
This fact, that the yen increased sharply this week, is one of the main culprits to the recent stock market decline, in my opinion anyway.
Tuesday, October 16, 2007
Ever since I turned bearish last week, gold stocks have continued to rise, but they have done so in a fashion not normally associated with a healthy bull market. The daily chart of the GDX, for example, does look worrisome to me. Please refer to the following annotations by clicking on the chart:
In addition, silver is looking weak right now. The following chart is a daily candle chart of SLV, the silver ETF:
Finally, the Australian Dollar, which is a currency very closely linked to the price of gold, looks overextended and ripe for profit taking now. I'll let this daily chart of the currency do the talking however:
So there you have it, three charts, showing three perspectives. I hope that makes sense. If you have any questions or disagreements, please write a comment below. Thanks for stopping by.
Saturday, October 13, 2007
I have been a subscriber of John Murphy's Market Message for a long time. I have an infinite amount of respect for Mr. Murphy, for the books that he has written, and the analysis he conducts.
Recently, video Market Messages have been made available. Here is one such video.
You can subscribe to Murphy's Market Message through StockCharts.com
This blog surely would not exist if it were not for StockCharts.com, and the teachings of John Murphy.
Wednesday, October 10, 2007
It is tougher now to pick bottoms in the US Dollar, because it is no longer contained in a descending wedge like it used to be, and the dollar is literally in uncharted territory. In other words, there is no support levels below. But there are other techniques that we can use.
One indicator that is useful in helping determine trend changes is the ADX indicator. This indicator illustrates if a security is trending or not. It does not differentiate between upward trending or downward trending. Here is a daily candlestick chart of the US Dollar Index:
The ADX indicator is shown on the bottom. The line that is most important is the thick red line. I have Stockcharts.com draw a horizontal line at 20 and 40. When the red line crosses over 20, then that indicates that the security is trending quite strongly.
When the red line crosses 40, that tends to indicate that the trend has just about exhausted itself. In the above chart, notice that whenever the ADX is over 40, the USD is close to bottoming out.
Also, in the above chart, the 9 day RSI is not an effective indicator. This ties into the previous post made, and is due to the fact that the RSI does not take into effect the long-term trend of the security. Using 2 Relative Strength Indexes for the US Dollar would be appropriate, in my opinion.
In conclusion, the US Dollar appears to have limited downside left for the short term. In the days ahead, this could put downward pressure on gold and silver. If you have any comments, suggestions, or criticisms please write a comment below, or send an email to DannyMerkel@hotmail.com.
Monday, October 8, 2007
The main thing to note is that when silver descended to the 200 day moving average, it immediately experienced buying pressure. Also notice that the bears cannot close the price in the blue rectangle support area. Please refer to the 2 previous posts for an explanation of this.
However, as each day goes by, I am becoming less and less confident that Silver will continue to hold this support. This is because, behind the scenes, the intermarket picture is beginning to deteriorate.
The Euro appears to me that it is now in correction mode. Whenever the Euro goes into correction mode, it has a negative influence on gold and silver. Here is a daily candle chart of the Euro index:
Last week, while on the subway, I thought of a new technique for using RSI to catch tops and bottoms. I figured that since the Euro is in a major bull market, its RSI will go deeper into overbought territory before registering a sell signal, and, on the other hand, more shallowly into oversold territory before registering a buy signal.
With this in mind, it seemed to make sense to use a less sensitive 14 period RSI for sell signals, and a more sensitive 9 day RSI for buy signals. This is what the above chart does.
In other words, in the above chart, we use the top RSI for sells, and the bottom RSI for buys. And as you can see in the above chart, the Euro has registered a sell signal. Once this occurs, the Euro has a tendency to correct until the point where it reaches a buy signal using the bottom RSI.
In conclusion, this could be viewed as a negative for gold and silver stocks for the next couple of weeks. The long term charts, as always, look excellent though, so I don't expect a significant correction. Thanks for visiting.
Tuesday, October 2, 2007
The daily silver chart, for example, is above three layers of support, which, coincidentally, are all in the same area:
The first support level is derived from the blue trend line. This line was resistance until the point that silver gapped above it. This old resistance line now becomes support.
The second support level comes from the 200 day moving average. I know for a fact that many traders place limit buy orders right on this level, which sometimes causes prices to bounce off this psychologically important level.
The third level of support originates from the gap itself. On one of the posts I made on the weekend, I drew a blue rectangle to illustrate that silver would find support in this gap area in the event of a correction.
In summary, therefore, I would say that at this time, the precious metals charts have not broken any major areas of support. If silver continues lower tomorrow, and breaks these levels of support, then I think that would justify taking profits and standing aside until the next wave higher inevitably comes about.