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The euphoria that surrounded gold two years ago made gold bugs wealthy as lofty predictions and price targets sent traders in a frenzy trying to play catch-up, but its decline over the last two years has shown us how quickly momentum can shift. And the accelerated drop in prices this year has been triggered by news of Fed tapering coupled with a stronger American dollar.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
How to read the charts
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
The American markets have been unkind since the start of May, but the markets might finally be giving investors a reprieve from a six-week correction. Chart patterns and techhnicals are indicating that a rally, maybe just a dead-cat bounce, is in the cards in the upcoming days. We've already seen three consecutive up days in New York, so there are still buyers out there.
The first positive sign is a convergence of negative indicators. Both the DMI and MACD on the Dow Jones have become less negative and might become bullish this week. Secondly, the Dow Jones is showing support at 12,000 and has held steady over the last three days, a good sign. Lastly, peculiar volume spikes have occurred only during reversals.
I don't need to talk too much about the DMI and MACD, as I've touched on it many times before, but as you can see, the "blue lines" are moving closer to the "red lines" on both lower indicators, suggesting that the selling is about over. A crossing of the blue above the red is considered a buy signal.
With the Dow approaching its inclining 200-day moving average, this could prove to be support for bullish traders. It also helps that the Dow is very close to its 3-year weekly trend line establish back in 2008 and a second dip in mid 2009. The Bollinger Bands have also stopped pushing downwards, constricting at these levels.
Daily volume on the Dow Jones barely budges above 200 million; most days, it doesn't even trade above 150 million. But there have been three instances where daily volume picked up and peaked just below 400 million shares. This occurred in the middle of March, when the markets massively corrected and touched annual lows. Days later, the market would rally and pare all losses in the prior weeks.
The second instance of abnormally high volume occurred in the final days of April, when the Dow Jones and other markets reached multi-year highs. After volume returned to normal on the last day of April, the market started its six weeks of bloodshed.
The third instance of high volume occurred just last week, when the market was preparing itself for the possibility of a Greek tragedy. Although no aid has officially been given to Greece, there is much belief that Greece will not default on its debt. Since the peak in volume, the markets has moved up about 2 per cent. If the abnormal volume is an indicator of reverse trading, we could see a nice move upwards.
The US stock market has not had weekly losses for six consecutive weeks since 2002. After that, the market rallied more than 40 percent in the following year.
Short-term buy signals have been triggered on some major copper stocks over the past few days, including Teck Resources [TCK.B:TSE] and Freeport-McMoran [FCX:NYSE], with an anticipated crossing on the DMI and MACD for BHP Billiton [BHP:NYSE] within the next few hours.
Teck Resources A Canadian play on copper would have to be TCK.B. Shares of Teck Resources had a buy signal on the MACD about one week ago, indicating the massive correction was coming to an end. Today, the DMI has had a positive crossing, suggesting an upward move to the top of the Bollinger Bands could be expected.
Freeport-McMoran Shares of FCX had two buy signals occurring on the same day, just three days ago on May 24. The stock has moved from $49 to $51.77 since that confirmed opportunity.
BHP Billiton The stock has already had a $5 move since copper hit $4 last week, but a buy signal is emerging on both the DMI and MACD. Its signals have not yet fully developed, but based on the moves on other major copper stocks, a trade on BHP with a call option, an uncovered put option, or an outright buy today would be an anticipative play, considering it has already moved 5 per cent in a week. Another consideration is that today's price action has moved the stock above the downtrend and the 20-day moving average - bullish notes.
Disclaimer: I do not own any of the equities mentioned in the article nor any derivatives of the underlying names. I do have a household position on Teck Resources and will most likely be trading the above-mentioned names in the next 72 business hours.
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A third increase to silver margin requirements in just eight days has triggered another sell off on the commodity. After failing to break above $50 a contract last week, silver has plunged to the $42 neighbourhood. Stocks and ETFs that track silver have started to break below the line of uptrend.
The iShares Silver Trust [SLV:NYSE], the world's largest silver-backed ETF, today, broke through below the uptrend on the logarithmic chart. As well, on the linear chart, the ETF closed right at the support level. Volume on SLV has increased substantially since peaking at $48.52, some days trading at three times normal volume. More than 200 million shares exchanged hands today, almost 9 times more than the 200-day average of under 29 million.
Increased volume can be used as a confirmation of a signal, validating that trader and investor mood's have changed. In this case, massive volume on down days suggests that buyers of silver and silver trusts have decided it was time to take profits, as the risk to reward ratio no longer favours longs.
Other technical patterns also indicate the rally is over, at least temporarily. The MACD and its Divergence moved into negative territory. The DMI has converged, a tool that is used to measure the directional movement of an asset. The positive DMI might possibly fall below the negative DMI tomorrow, a bearish sign. Its ADX has also peaked and is reversing as well.
Another telltale sign was that silver stocks had not participated in a rally. When the stocks of companies that mine or sell silver do not move up with their product, it is often a sign that the underlying commodity is mispriced for the short-term. Investors did not believe silver was worth $50 and would not push up the value of their stocks. This also holds true when an asset, such as silver plummets to serious lows, but silver stocks do not fall.
So, where is silver headed? Many bold predictions have been flaunted in the market. Some say $35 by June, others say $100 by December 2011. They could all be right or they could all be wrong. The only thing that is for certain is that silver is now at an impasse and a move in any direction will be chased by many. Expect massive volatility for the next few sessions.
Every so often, a tiny company posts news that send traders into a frenzy. These penny stocks soar hundreds of percent in a matter of days making early investors very wealthy. Volume could jump from as little as 25,000 to 100 million, as traders get a little envious and want in on the price action. This is what we're seeing with Intertainment [INT:TSXV], the next penny stock that just went viral.
The stock went from being worth a dime a share to over $3 in less than three months, but the move was not a nice steady line most value investors look for, it was a bumpy three months where price action occurred at the start of February and just this week, a gap of ten weeks. And those who bought it the first time it went exponential would have seen themselves buying into massive exuberance, often irrational, followed by roughly half their investment wiped out in two days. If they had waited ten more weeks, they would have seen their investment, or more accurately, gamble, grown to almost three times their original purchase.
Of course, having worked in the investment industry for years, I know that those who bought near the highs are often not sophisticated traders and were buying into the hype. Eventually, these traders will get burned (as we've already seen today alone). As well, their level of patience is no where close to a fund manager or a value investor who might wanna wait it out.
Historically, penny stocks that make major moves and go exponential eventually succumb to reality. Earlier in the year, rapper 50 Cent tweeted about a stock called H & H Imports [HIHN:OTC], sending the stock up ten times its value in days. Several weeks later, it had another bullish move, sending it to $1.75. The stock was 4 cents before the tweet. Where is it now? 73 cents. That's about 40 per cent from its highs obtained when five million shares moved it up in March.
Last year, Electrovaya [EFL:TSX] had major news and went from under $1.00 to over $4.00 in just over a week. Volume surged to over 6 million from just a few thousand per day. Where is this stock now? $2.12.
Before that, there was Resverlogix [RVX:TSX]. It almost tripled from about $3 to $8 in a few days. The stock today is at its lowest point in the last three years, $1.97.
And one final example, Weststar Resources [WER:TSX], a stock I sadly own, and bought at the start of my trading days. The stock, which has done a reverse stock split last fall, went from $2 to $14 (it was actually about 15 cents to $1.10 pre-split) only to have fallen from grace as well. Today, it is 95 cents, and was as low as 17 cents in the summer.
If there is any lesson in this, it's that if you have never heard of the company before it went viral, your best bet is to stay the heck away from it. Most traders are unable to short against the hype, which I have done to two of the stocks above. The truth is, Intertainment will be a long, forgotten stock by the end of April whose securities will probably be sitting in someone's account, along with Nortel, Weststar, and the rest.
Shares of Netflix [NFLX:NDQ] has been caught in a downtrend since it peaked at almost $210 back in November, but technical indicators are suggesting another bullish rally may be in store.
Although on just average volume, shares of Netflix surged $8.58, almost 5 per cent, today closing at $187.88, above resistance of $184.90 according to TradersHuddle.com. The move may have to do with four brokers reiterating their target on the company. Piper Jaffray and Canaccord Genuity have an overweight and buy rating respectively with price targets above $215 while one reiterated a neutral and one initiated a sell rating.
But if you're a strong believer in technical analysis, like myself, today's large swing was an eventuality. I had been watching the stock for quite some time and noticed the shares developed a pennant-like formation (see link for more info) since its correction in December and was days from breaking up or down. Today's upward move looks like it could be a continuation pattern from the bullish rally seen in November but we will have to wait two more days to see how the shares trade.
The MACD also reversed (see below) and looks like it may turn positive if the shares rise again tomorrow, giving traders a second buy signal.
Chart courtesy of www.bigcharts.com.
The company will be releasing its Q4 earnings on Monday January 24, 2011 which will include revenues from streaming its services into the Canadian market. A rally back to near $200 or above is not unreasonable as traders push the stock up in anticipation of another stellar quarter. Of course, expectations have been set high so selling prior to the earnings report AMC on the Monday could be a wise trade. Consider replacing your shares with a cheap weekly call or bullish spread if you still want to participate in the earnings on a less riskier scale.
Disclaimer: Neither I or any household members own shares or derivates of Netflix.
On May 20th, we saw the American markets drop below the 200-Day Moving Average (see previous post) followed by continued drops and extreme volatility. And now almost one month later, the American markets have surged well above this technical level. Not only that, the markets are back close to positive territory for the year. For many, this is a good sign that the bear market has ended, something I had recognized, but I don't think this is the restart of the bull market.
The market tends to be extremely volatile during options expiry week (the third Friday of every month), where daily swings of over 100-points is typical. Traders may try to move stocks into more favourable positions against their options for maximized profit or minimized losses. Therefore, we could see markets continue huge swings before this week ends.
Today's huge rally was highly unexpected with very little significant news impacting stocks. Commodities, especially energy, have surged in the last week as signs of a recovering economy took focus away from the European crisis. The continued upward move on the day could be a result of a short squeeze, a situation where shorts are forced to close out positions for a variety of reasons.
Just eight trading days ago, the Dow Jones closed below 10,000 on bad jobs news. Today, it closed above 10,400 for the first time in almost a month. Although I think June will finish higher than the end of May, I do not see this rally sustained until the fall. Volume was average, suggesting few traders believe in this rally. Strong volume is required for technicians to feel confident in a technical break out.
I'm going out on a limb here, but I can see the Dow finishing below 10,200 by Friday, barring major news.
History has shown that the markets tend to suffer during the summer months, something I made note of in "Sell in May, Go Away" but one small blip seems to occur right around Memorial Day.
A 6-day span comprising the Thursday before Memorial Day to the end of the Friday after Memorial Day has returned an average of 1.3 per cent, a significant amount considering the summer months rarely return 1 per cent.
Since the start of Thursday, the Dow Jones Industrial Average has gained over 250 points, or 2.5 per cent, with two days to go. Strong fundamentals in the American economy took over trading Wednesday, pushing the markets up 2 per cent, giving this seasonality trend a chance to fulfill. Concerns in Europe continue to linger in the market, but with all the bad news out of the way, traders are starting to focus on the economy in the United States and Canada.
Today, US May auto sales showed double-digit growth and US pending home sales grew at a larger-than-expected pace in April, fueled by tax credits. According to an Associated Press article featured on Yahoo! Finance, values of home equity seems to have bottomed, and used car prices are increasing, persuading car buyers to buy new. Friday could prove to be the decisive trading day with monthly job reports to be released.
The technicals also show significant support at the 1,075 level on the S&P 500. The market's reluctance to fall below this level has been supported by big surges in the following trading day; today was the third time this has happened. A second signal that the bear market is over: higher lows have formed since the market dropped almost 10 per cent from a "computer glitch." The sudden rise at 2:30 PM today also broke a short-term down trend that formed in the last week. And the forth reason there may be a short-term rally: the MACD patterns on the NASDAQ have gone positive, and the S&P 500 and Dow Jones are approaching this as well.
The final hour proved to be another profitable and predictable day for me, something I mentioned in "Trading the Final Hour", as bullish momentum continued throughout Wednesday.
With all this said, there are still dangers in this market. Fundamentals continue to shine, but there are still pockets of negativity emanating from Europe that have been the focal point of traders. I had been bearish in May, but I believe this rally today will lead into a better June.
All four major North American markets have just dropped below the 200-day moving average today. Toronto, the Dow Jones, NASDAQ, and the S&P 500 are down between 1.7 and 3.5 per cent on more terrible news in Europe.
A drop below the 200-day moving average is not a good sign. Long-term investors should consider protecting their assets through a variety of hedging strategies, preferably writing deep in-the-money calls. Consider selling June strike prices 5 per cent below your stock's current value, or even higher if you think there is a 20 per cent correction on the horizon. Just be cautious as this is an automatic exercise if the market turns around sharply or decides to stop falling.
For example, Bank of Montreal [BMO:TSE] is trading at $59.90 (at 12:50 PM EST) and the June 58 call, which is $1.90 in-the-money or 4 per cent, is bidding $3.30. Time value is $1.40. So, if your stock falls below $58 by June 18, you earn $3.30 to offset any loss on your stock. It also allows you to be a little wrong. If BMO finishes at the same value that it is today, you still make $1.40 and if it goes up, you earn the difference of $1.40 and how much the stock is up.
This strategy replicates a sell today without creating a down tick on the market itself and allows you to capture any time value on the option. As well, most widely held stocks are going ex-dividend by June expiration and I sense many investors are not in the mood to trade.
The other levels we should keep an eye on is the Dow Jones at 10,000. Although this level is not a real technical level, it is a psychological level that many amateur traders might use to sell or try and push the market lower.
Although most of my topics are geared towards buy-and-hold readers, there are times when learning technical analysis can come in handy. Charters or technicians (both terms are often used) have an arsenal of weapons at hand, including indicators, moving averages, and volume. These patterns are often used by traders to determine enter and exit points and strategies to maximize returns and lower risk.
My friend Christian asked me to write a post about Fibonacci Bands and it got me thinking, maybe I should write about the basics of technical analysis for you guys. It's helped me make a lot of money over the past few years as well.
I won't immediately post about Fibonacci Bands because some of its foundation is built on basic technical analysis theories, so I will start with the most commonly-used pattern - moving averages.
There are two types of moving averages that I've seen: Simple Moving Averages (SMA) and Exponential Moving Averages (EMA).
When it comes to trading, I prefer using the SMA. As it name indicates, it is simple. The moving average takes the closing values of the past x days and takes the average, then plots it on a chart. You can also do this by hand if you really wanted as well. Most traders like to use 20 days, 50 days, and 200 days, and many websites allow for three moving averages to be plotted on a chart.
The chart below (www.bigcharts.com) of Google plots the SMA 20, 50, 200 and creates a line chart for each moving average coloured yellow, blue, and pink respectively. Ignore the red lines; those are Bollinger Bands, a future chapter.
Moving averages can be significant for traders. A moving average charting higher indicates a bullish trend and vice versa. This provides some direction on where the market or stock may be going in the short term.
A second reason moving averages are important is when they cross. When the moving average of a shorter-term (20 for example) moves above the moving average of a longer-term (50), it indicates a bullish trend. This is known as a golden cross and the time to buy is now. When the moving average of the short-term goes below the long-term, it's a signal to sell. This is known as a death cross. The names are quite self-explanatory.
If we use the Google chart above, find a location where the yellow, blue, or pink lines cross. You can see that when the 20-day (yellow) dropped below the 50-day (blue) and 200-day (pink), it was followed by falling prices or stalled rises.
These signals carry more weight when attributed with above average volume. Volume represents the number of shares traded in a day and indicates conviction. Many times on television, you will hear them say, "very little volume" or "heavy volume." Take note of that because it can be very important when you want it to confirm with patterns.
On Monday May 10, I posted this article "Dead Cat Bounce in the Making" and wrote "Tomorrow is the third day, and if it does not trade and close above that level, expect another bad month of May." It is now Friday and the market has dropped again. It took a few days, but shorts are now making good money.
Although signals never work 100 per cent of the time, it is good to ease fears or calm excitement. Many traders do not use charts and as a result, emotions can get the best of them. Charts allow people to understand how a specific stock trades and if the recent drop in the price is nothing but noise over the long-term goal.
Good luck and if you want to try it, follow some big stocks in the next few weeks and see if it works. Let me know about your success.
