Saturday, August 30, 2008

Month End Gold and Euro Review

The above chart is a monthly chart of the XAU gold and silver stocks index. This is the same chart I had posted two weeks ago. Since this is a monthly chart, the candle to the extreme right of the chart has now formed, and a new candle will begin forming on Tuesday.

August's monthly candle descended to the upward sloping trend line, and decisively bounced off this level. Furthermore, the price also cleared the horizontal shaded support area, which represents the XAU's previous highs. Both developments are bullish, in my view.

The next chart is a weekly chart of the Euro:

As you can observe, the Euro is testing its upward sloping trend line. At this point, it is holding this level of support, which is bullish for gold and silver. I have no way of telling if this level of support will continue to hold, but for as long as it does, I would count it as a bullish factor for precious metals.

My Renko trend model says that gold's short term trend is neither up nor down. This means that I am unable to take a position until gold decisively moves back up, or fails and continues lower.

In the meantime, I can still indirectly get into the precious metals area by buying Eldorado Gold. This gold stock is on a Renko buy signal, and is showing excellent relative strength against the Canadian gold stocks sector. The following chart shows Eldorado divided by XGD:

Eldorado Gold is one of the only gold stocks that I could find that is still in an uptrend. The fact that this stock was able to hold its ground and withstand the severity of the recent commodity correction is a testament to its strength.

On another note, my stock scanner found another stock to go long this week. The name of the stock is Daylight Resources Trust, and the ticker is DAY/

As you can probably tell, this stock is in a very powerful bull market. As soon as I bought this stock, it began to appreciate. The reason for this is that when a trend is in motion, it has a tendency to stay in motion. Put another way, at the moment of me purchasing this stock, the probability of it continuing to trend was higher than the probability of it turning around.

In the event that this stock does turn around, which is entirely possible, then I will cut losses once it penetrates the 50 day moving average on a closing basis. Otherwise, it will be held for as long as the trend continues. This strategy allows for potentially unlimited gains, yet limited losses.

Turning back to gold, I feel that the fundamentals are still unbelievably strong, and fundamentally nothing has changed, so therefore I remain bullish long-term on this sector. The video clip below, done by Mike Maloney of, is an interview with congressman Ron Paul, and, in my opinion, explains the fundamentals of gold probably better than anybody else:

If the video above is not working, then please click here.

Thursday, August 28, 2008

Jesse Livermore on the Importance of Trends

The following is a quotation from the novel Reminiscences of a Stock Operator, written in 1923 by Edwin Lefevre. This quotation helped reinforce in my mind the importance trading in the direction of the primary move, and to avoid the noise of short-term fluctuations.

His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast. The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap's answer was always the same.

The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?" Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, "You know, it's a bull market!" Time and again I heard him say, "Well, this is a bull market, you know!" as though he were giving to you a priceless talisman wrapped up in a million-dollar accident-insurance policy. And of course I did not get his meaning.

One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning's story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. 

It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it. Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours." Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out. 

"Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap. "Well, now is the time to take your profit and get in again on the next dip," said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary's face Elmer went on: "I have just sold every share I owned!"

From his voice and manner you would have conservatively estimated it at ten thousand shares. But Mr. Partridge shook his head regretfully and whined, "No! No! I can't do that!" "What?" yelled Elmer. "I simply can't!" said Mr. Partridge. He was in great trouble. "Didn't I give you the tip to buy it?" "You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But --" "Hold on! Let me talk! And didn't that stock go up seven points in ten days? Didn't it?" "It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock." "You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. "No, I couldn't." "Why not?" And Elmer drew nearer. "Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation. "That's all right," said Elmer, looking angry because of his disappointment. "I know this is a bull market as well as you do. But you'd better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself." My dear boy," said old Partridge, in great distress "my dear boy, if I sold that stock now I'd lose my position; and
then where would I be?"

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: "Can you beat it?" he asked me in a stage whisper. "I ask you!" I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five hundred shares. He's got seven points' profit and I advise him to get out and buy 'em back on the reaction that's overdue even now. And what does he say when I tell him? He says that if he sells he'll lose his job. What do you know about that?" "I beg your pardon, Mr. Harwood; I didn't say I'd lose my job," cut in old Turkey. "I said I'd lose my position. And when you are as old as I am and you've been through as many booms and panics as I have, you'll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don't feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It's a bull market, you know." And he
strutted away, leaving Elmer dazed.

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market.

The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me. I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

Saturday, August 16, 2008

Gold Stocks Damage Assessment

In this post, I will attempt to analyze the severity of this week's sell off, and contrast it with the sell off we had this time last year.

Much of the weakness we have seen in the gold market comes from a rapidly appreciating US. Dollar:

As the above chart illustrates, the US Dollar has exploded past its 50 day and 200 day moving averages, which is short-term bullish. However, the 200 day moving average is still trending down, which means to me that the long-term trend is down.

I never thought I would say this, but the US Dollar at this point is extremely overbought, after devastating all major worldwide currencies this month. For example, the US Dollar has appreciated against the British Pound for 11 consecutive days in a row. Nonetheless, I still feel that this is a counter-trend rally at this point, as the next chart will hopefully show.

The next chart is a weekly chart of the Euro:

The above chart shows that the Euro is still contained within its long term uptrend, and is now testing its bullish support line. I feel that at this point there has been no long-term damage to this chart, and I will maintain this view for as long as this long-term trend line holds.

It is worth noting that we suffered through a sharp correction in the Euro this time last year. If you want to get some background on this, please read what I wrote this time last year.

Finally, here is a weekly chart of GDX:

Gold stocks continued their short term trend downwards this week, and have descended to an area of strong support. As the above chart shows, this will be the fifth time that GDX has tested this support area. It is essential that GDX holds this area on a weekly closing basis for the long-term trend to remain positive. If you are curious to know how this chart played out this time last year, then please read this post.

For my own personal trading account, I continue to hold my short position, since the short-term trend remains down. I am sensing that my position will not last for much longer, but I will let the price make the decision for me. At the same time, for my long term investment plan, I do plan on doing some serious dollar cost averaging of physical silver at my favourite coin shop this weekend.

Sunday, August 10, 2008

The Bubble is Bursting

For this past week, commodities corrected quite dramatically, which, I am sure, has left many commodity bulls feeling somewhat nervous. If this is the case, I hope that this post will help assuage any doubts.

The first chart is that of the XAU. It is a monthly chart that goes back until 1981:

In my view, the XAU is still in a very powerful bull market. This is evidenced by the fact that over the last 6 years, we can observe a series of higher highs and lower lows. Furthermore, all moving averages are also positively aligned at the moment.

It is often said on financial news stations that gold or commodities are in a bubble. I could not disagree more strongly with this type of statement. One reason for my view is that if you glance at the above chart, you will notice that gold stocks are still at approximately the same level that they were at 25 years ago. I cannot come up with many other asset classes that are in this position.

For a bubble to occur, the general public must become over zealously bullish on a sector. This has not even come close to happening with gold and silver. As an example, the bank I am employed at offers a precious metals mutual fund. This fund fully makes up 0.03% of assets under management. Contrast this number to the prevalence of high-tech holdings seen during the late 1990's.

The next chart also should support gold's case. It shows the Dow Jones divided by the value of the Gold since 1981:

In the early 1980's, the the Dow and an ounce of gold had roughly the same value. During the 1980's the Dow and the price of gold began to deviate, as the Dow rose, and gold fell. This trend continued well into the 1990's, where the pace began to accelerate, ballooning to the point where the Dow could buy over 40 ounces of gold.

This trend lasted for 20 years, and extended 4,000% against the price of gold. However, since the year 2000, this trend has changed directions, and has been deflating remorselessly since then. This is the real bubble that wall street does not mention.

Since I feel that this concept is so important to understand, I have included the opposite perspective of the chart below. It shows gold divided by the Dow:

A few weeks back, I was listening to an interview with investment guru, Peter Schiff. When pressed for an eventual upside target for the price of gold, Schiff said that he thought that the Dow and gold will eventually have the same value. If this is the case, and I believe that it is, then the chart above has a lot more climbing to do.

Anyway, here is a monthly chart of silver:

Silver is in a similar situation to the XAU mentioned above. Obviously, it is in a very strong bull market as well, and this correction is not unlike the corrections we've seen before.

Keep in mind that these charts present a bullish case for gold for the long-term. I am not suggesting that gold will necessarily rise next week. In fact, I have no idea what will happen next week. For the short term, gold has been in a a very clear downtrend, and following the rules outlined in my previous post, I had no choice but to short gold stocks over the last 2 weeks, and I will continue to hold my shorts for as long as the short-term trend persists.

Wednesday, August 6, 2008

Trading Stocks Without Predicting the Future

A few weeks ago, introduced Renko charts, and, since that time, I have really developed an appreciation for this charting style. Renko charts, like candle charts, are a Japanese charting style. Renko charts differ in that they do not factor in the passage of time, and, thus, only use price in their construction.

I feel that Renko charts can be used very effectively to determine trends. The chart below is a monthly Renko chart of the Canadian financial sector and goes back three and a half years:

Outlined in the chart above is a buy and sell system that I am using in my own trading. The system has the following rules:

  • Buy signals are generated when the price is in a column of 4 white bricks or more and above the moving average line.
  • Buy signals are removed when your long position moves against you by 4 bricks
  • Sell signals are generated when the price is in a column of 4 dark bricks or more and below the moving average line
  • Sell signals are removed when the short position moves 4 bricks against you

By following these simple rules, the areas shaded yellow you would be long, the areas shaded in orange you would be short, and the area where there is no shading you would be neither long or short.

Although these rules are simple, they allow a trader to gain an edge in that they will allow you to:

  • Buy strength in bull markets
  • Short sell weakness in bear markets
  • Avoid getting involved with weak counter-trend moves (like what we have now in financials)
  • Cut losses short
  • Let winners run
  • Separate emotions from decision making
  • Avoid hours of analysis or try to predict the future

I sense that most traders are hesitant to following such a simple plan, as it is sometimes felt that making money in the market surely must involve more than this. However, after spending thousands of dollars on books, and years of research, there is no question in my mind that any trading method must involve these rules.