Sunday, February 10, 2008

Technical Charts of the Forex and Gold Markets

Last week began with gold getting hit quite hard by the bears, but ended with gold actually up by about 9 dollars. Gold held up surprisingly well considering the Euro basically collapsed at a key level of resistance last week.

Let's have another look at the Euro Index to see what we can expect to see next. The following image shows a chart of the Euro's Commitment of Trader structure on the top, and a candlestick chart of the Euro on the bottom:

Presently, the commercials have dramatically reduced their short position. In fact, they are getting close to being net long, which I have never seen happen before. You always want to keep a close eye on the commercials, since they usually represent the smart money. Therefore, this represents a very bullish development for the Euro, in my opinion.

Putting my college education to work, by using MS Paint, I have drawn green circles in the above chart representing previous occasions where the commercials reduced their shorts. As you can see, these were all good entry points.

Bearish signals are generated when the large speculators become excessively long, or if open interest peaks.

If gold can rally when the Euro is falling, I think it means that gold is in strong hands right now. Gold, silver, and gold stocks are all in strong uptrends, and it would be foolish to fight these trends.

The next chart shows the relationship between gold bullion, and gold stocks on the top, and a daily chart of XGD on the bottom:

In the above chart, the top panel vacillates between areas where gold stocks are expensive relative to gold bullion, and areas where gold stocks are cheap relative to gold bullion. Presently, the RSI of the ratio is in oversold territory. As indicated by the yellow zones, these occasions have represented good gold stock buying opportunities.

An alternative strategy involving the above chart would be to go long gold stocks and to go short gold bullion. One could do this by simultaneously buying and buying This would represent a low risk, low reward play, in my opinion.

Further Recommended Reading:

1) Canadian Point and Figures
2) Guerrilla Investor

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