Sunday, January 13, 2008

The Technical Analysis Continues

I think it has been 3 weeks since there was a post to this site. The reason for this is that I have moved into a new apartment, and it took some time to get settled in, and to get an internet connection reestablished. Going forward, there will be posts every weekend on this site, at a very minimum.

I left off saying in the previous post that the bearish momentum was being lost, and it looked like demand was starting exceed supply in the gold stocks sector. Here is a daily chart of the HUI that I found interesting:

There were a few posts in December that discussed a potential bearish head and shoulders pattern forming in the gold stocks charts. The above chart shows that interpretation never did come to fruition. However, when the HUI started forming hammers right at a strong support area, I think there was ample warning to cover any short positions, and consider possibly going long.

Furthermore, when gold broke out of the triangle mentioned in the previous post, you knew that going long was the better bet. To be honest though, I did not anticipate such a quick rally in gold. The fact that the triangle unfolded just like everybody suspected it would surprised me, since gold rarely does what everybody is thinking it will, which is why I am always leery of breakouts.

The only area that I played since the last post was the Canadian Energy Sector. I bought shares of an ETF that does twice the daily performance of this sector. The ticker symbol is Here is a daily chart of it:

There are so many great technical patterns that formed in the above chart. I am sure if you just click on the chart, you will see most of them, but what I felt was the strongest piece of evidence, evidence that the bulls were in control of this market, was the island reversal that formed in December. Your cue to exit was the red resistance area and overbought condition formed near the beginning of January.

In terms of where the markets are going to head in the next week, let's have a look at a daily chart of the TSX:

As you can see, the TSX is presently being compressed into an area defined by clear support and resistance. A break below the blue line would be very bearish, but a break above the red zone would be quite bullish. The odds favour a breakout to the upside, in my opinion anyway.

Finally, I think some of the impetus for a TSX breakout will be a resurgence of a beaten down banking sector. Although I never talk about financial stocks on this site, I still think this following chart is interesting:

The above chart is a weekly candle chart of an ETF that follows the Canadian Financial Sector. Although the TSX is heavily commodity driven, in order for the TSX to muster enough strength for a rally, it will still need help from this sector. And by the looks of it, that help might be in the cards for the next couple weeks. I am predicting that this ETF will hold the green support area indicated, which will help the TSX bounce off its support area.



Welcome back Danny. I missed seeing your posts. I agree with your analysis of the HUI chart.
Are you as bearish as I am in regards to the broad markets ($INDU, S&P 500 etc)? Do you think that the precious metals have decoupled from broad market sell offs?

The Word said...

Welcome back Danny. I was starting to worry. I really need my "Gold fix".

Did you participate in the HGU upswing? That has been an incredible ride!

I was somewhat surprised by your comment that the "odds favor the TSX breaking out of the double top. You are obviously seeing something that I am not seing. I would say the odds are even. But that is what makes a market

robby p said...

Good to see you back Danny. I'm a regular on your site.

Danny Merkel said...

Folks, I really appreciate the comments.

The Word, no I didn't participate in that run up. After my December puts expired, I basically took a chart watching vacation until about a week ago, which is unfortunate.

Paul, I am not really an expert on the US Markets. Long term, I am convinced that no real wealth can be accumulated by investing in US Markets, even if the Dow goes to 50,000. I find that the Dow is more a less a function of US Money supply than anything else.

I recommend Headline Charts for shorter term analysis of US Markets.