Sunday, January 27, 2008

The TSX, the Euro, the Yen, and Silver.

For this past week, gold was up $29.00 an ounce, reaching yet another all time high. Also, the TSX basically fell apart on Monday, but, from there, was able to stage an oversold rally.

During these times of extreme volatility, interesting chart formations usually begin to appear, and this week, the TSX put in a candle formation know as the bullish counterattack line. In his book, Japanese Candlestick Charting Techniques, Steve Nison describes this pattern as follows:

This pattern occurs during a decline. The first candlestick of this pattern is long and black. The next session opens sharply lower. At this point, the bears are feeling confident. The bulls then stage their counterattack as they push prices back up to unchanged from the prior close. The prior downtrend has then been bridled.

Here is a weekly chart that actually shows this pattern:

Obviously, it takes a tremendous amount of volatility for the TSX to gap down 500 points, and then turn around and make up those losses. I find that trading stocks is difficult during these times, because there is always the possibility of being blown out of a position when there is a huge gap when the market opens.

This is why I have turned my focus to the foreign exchange market. I have started trading Forex again, and will continue to do so, because of the following advantages:

1) Guaranteed Stops- risk management is very easy
2) Open 24 hours a day- that means very few gaps, and can trade after work
3) Free Leverage- no monthly margin costs
4) Can go short or long with a click of a mouse.
5) Reasonable transactions fees

Furthermore, I can still make my bets of the direction of the TSX through the Forex Market. The Euro/Yen cross follows the TSX very closely. Here is a daily chart comparing the two:

In other words, if I feel that the TSX will fall, I would go long the Yen and short the Euro. If I thought a rally was in the cards, I would short the Yen, and go long the Euro. You can also play out your gold predictions by using the Euro/USD cross or the Aussie/USD cross.

I should say though that Forex trading is risky, and most people who trade it will eventually lose all of their money. The TSX will rise and fall, and gold will rise and fall, but gold, at least, is a bull market, so that means I would only spend 10% of your funds trying to trade the ups and downs, and 90% of your funds in a core position, that you do not touch.

The trend for silver is also up. There will be days when it drops 5% in a day, and it could even happen next week, but I have no idea. The main point is that it is in a bull market, that means you do what the well known precious metals expert Bob Chapman says, and that is to get long and stay long. Here is monthly chart of silver:

There will be a special post released on this blog on Wednesday. Thanks for visiting.

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