Wednesday, October 31, 2007

A New Index and a New Indicator

When analyzing gold stocks, I try to look at as many indexes as possible. Some indexes that I watch are the HUI, the XAU, GDX, and XGD.to. The advantage of this is that occasionally one of these indexes will give a heads up not provided by another index.

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.

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3 comments:

The Word said...

Hi,

I don't know if you are still negative of Gold but this index appears to me to be in an uptrend.

Unfortunately, it is unclear how you are projecting the value of this into given that you show resistance (suggesting some topping perhaps) and the PPO which you suggest is not yet overbought.

Regards,

The Word

Danny Merkel said...

The Word,

You are right, I did not build any forecasts into this analysis. I was simply looking at the current situation, and I`ll let you come to any conclusions.

I am, however, maintaining my original positions. That being said, I am on the brink of being stopped out.

Like you say in your blog, and like I say in my other blog, it is always better to trade with the trend, which I have not been doing in this case, but counter trend trading does have its advantages from time to time as well.

New Era Investor said...

Hi there,

Your % above the 50 day moving average looks similar to one used by Adam Hamilton at Zeall though he divides the price by the 200 day moving average.