Sunday, April 6, 2008

Gold, Swiss Franc, and Vix

Gold started the week with very little strength, but firmed up towards the end, closing down only about 2.5% for the week. I mentioned in the last post that I was getting mixed signals, and I was not confident of which direction gold would pursue.

Since it is not always possible to feel confident about the direction of a market, one must develop a method for making money in the market in times of ambivalence. Successful traders can make money without feeling confident about which way the market will move, and they do this by following the trend, and managing risk.

There are several ways of determining trend, but one of the simplest is through the use of moving averages. The following chart attempts to divide gold into up trend and down trend segments using moving averages:

The above chart, just like all the charts I post, shows a 9 day exponential moving average in red and 20 day moving average in blue. The purpose of the lines is to determine the short term trend. Furthermore, the indicator on the bottom panel of the chart is a modified MACD that displays the distance between the two lines.

When the MACD line is above zero, that means that the 9 day EMA is above the 20 day EMA, and this means that the short term trend is up. Currently, however, the opposite is true, and, therefore, the short term trend is down.

If we were purely trend traders, the above chart would probably be all the analysis that we would have to do. However, I let's explore some intermarket analysis:

The above chart is a daily chart of the Swiss Franc. Gold and the Swiss Franc exhibit a fairly tight correlation, so I usually keep an eye out on this currency. What strikes me about the above chart is that the Swiss Franc may be topping out at the psychologically important 100 area. The 100 area means that it takes 1.00 Francs to buy an American Dollar. Also notice the divergence on the RSI.

I think that one of the reasons the Swiss Franc went parabolic was because this currency, like gold, is considered a safe haven investment. What could hurt the Swiss Franc would be a temporary return to normality in the equity markets.

One way to gauge normality in the markets is to look at the Volatility Index or the VIX. The VIX measures the average implied volatility of the options of the 500 stocks that make up the S&P 500. When things start hitting the fan, the VIX will tend to shoot up, and when things are normal, the VIX will trend downward.

Let's have a look at the VIX:

In the above chart, the VIX is displayed on the top panel and the SPX is on the bottom panel. What I find interesting is that the VIX is being compressed into a very large triangle formation. Also notice that whenever the VIX has found support, the SPX has fallen precipitously. The resolution of this triangle will certainly have an impact on the need for safe havens such as the Swiss Franc and gold. A break below the support level would be bullish for stocks, and potentially bearish for gold.

Another intermarket relationship that I like to observe, and I know a lot of bloggers and analysts look at this too, is the relationship between the Japanese Yen and stocks:

For reasons explained elsewhere on this site, the Yen and stocks tend to trend in the opposite directions. The main point for the above chart is that the Yen is currently overbought, near round number resistance, and is looking weak due to the bearish candle put in.

Finally, one last chart that caught my eye this week is a chart of Canadian Financials. I've never been good at predicting movements in banks, but I can't help but think that the chart below looks bullish:

Anytime an index or stock gaps above its 50 day moving average, you know the bulls are in control. Also notice how the 50dma was resistance for the entire move down. The candle and volume patterns also look favorable to me. Perhaps the bears will give this sector a break for a couple of weeks. I will release an additional post on Wednesday.

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