Monday, October 8, 2007

A Chartist's View of the Euro Index

For the Canadians reading this site, I hope that you had an enjoyable Thanksgiving, and for the Americans reading this, my apologies for not posting for a while. The last post that was made was in regards to silver holding support. Here is an update on that chart:

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.


The Word said...

Hi Danny,
The concept of using different RSI is somewhat similar to the research Gerald Appel has done on his MACD indicator, for a profit... of course. The variable he uses are unknown unless you pay.
As you may know, John Murphy prefers RSI(9) (I do too) but he does not make any differentiation between the Buy and Sell signals.

I know a lot of people use RSI the way you describe it (from overbought to below 70 is Sell and from oversold to above 30 is Buy) but I have generally found this approach too erratic because it does not take into account the mathematics of the RSI and it fails as a reliable trend change indicator, at least for my purpose.
In my very humble opinion, one needs to tackle the problem of what you do with the 50 mid point line which to me has a lot of value given that it often acts as support or resistance in an ongoing trend. Arthur Hill has done some significant research on this over the past few years.

Your point on the Euro weakness is well taken. I'm not too happy about the long tail shadow for Friday. The hangman at the top of a trend as you know (since you have a dedicated blog on candlesticks) is something to worry about.
The Word

Danny Merkel said...

The Word,

It is always an honour to hear your comments and insights.

I agree with you that using RSI is usually an unreliable trend change indicator. It must be used in conjunction with other forms of analysis.

Arthur Hill is obviously a very intelligent man, I have always enjoyed his analysis, and his work, as you mention, on RSI is interesting.

In regards to the hanging man candles, you are right about that. The daily Euro chart recently formed one, and the weekly GLD did as well.

I could never understand the psychological implications of the hanging man candle though. It is essentially the opposite of the shooting star, yet both are supposed to be bearish. Steve Nison has explained that, for this reason, the hanging man is not a very powerful indicator.

Thanks again.