Saturday, November 13, 2010

Buy Signals on the Way - AGQ, GDX, GLD and SIL

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I'm going to go out on the limb and say that I expect to see BUY signals across the board in the precious metals sector sometime next week.  And I'll show you why with charts of AGQ, GDX, GLD and SIL.
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But first, the obligatory housekeeping for my TSI Trading record.  Just one to record for Friday - a buy of Proshares Ultra Silver (AGQ) for $118.45.  Honestly, I made three purchases of AGQ on Friday, but will record these trades as one at the average blended price of $118.45.
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Click on the chart to ENLARGE




OK, now for some thoughts and analysis of the upcoming week in the precious metals space.
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The sell off on Friday, steep, emotional and vicious as it was, did wonders for getting us ready for the next leg up.  Not only did it scare the pants off the weak, it also created a beautifully crafted True Strength Index (TSI) indicator trend line above the ZERO crossover that we can use to game the next BUY  signal. Something you will observe in all four charts is not only the favorable trajectory and location of the TSI trend line and how it is likely to be played out, but also the issue of unfilled open gaps on each chart, except GLD.  My thought is that both of these dynamics (TSI trend line and open gaps) are going to play very favorably for the precious metal bulls next week.
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In alphabetical ticker symbol order, let's begin with a look at Proshares Ultra Silver (AGQ). First, you will notice that a similar TSI setup that developed towards the end of October, and how it was favorably resolved with an accurate and timely BUY signal.  The current setup, however, will be resolved in fewer days as the slope of the TSI trend line is noticeably steeper.  Which is to say that a single day of strong price action will likely trigger a trend line break.
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The thing one has to keep in mind, and it is not appreciated by the casual observer, is that these setups are occurring above the ZERO line.  Remember, when the TSI is rising above ZERO, price is always rising.  So, when the trend line break occurs, the TSI will be rising from just barely below or slightly above ZERO, triggering the bullish BUY sign of the ZERO crossover.
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Now let's look at the Market Vectors Gold Miner ETF (GDX). Here we find an open gap and just below that an impressive layer of support.  The gap may or may not get filled but I would be quite surprised if price is able to penetrate the layer of support.  I think too much buying will come in to permit that - for very long, in any event.  We notice the TSI is heading in a sharp trajectory downward but well above ZERO.  As with AGQ, a single day of sharp buying will cause a trend line break BUY signal.  
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This next chart of the SPDR Gold Trust ETF (GLD) may provide the most interesting clue of all, and it is this:  the open gap, as seen on the other three charts, is already filled. This suggests the possibility to me that this downdraft in not only GLD, but precious metals generally, may have already concluded. If not, then I would expect GLD to trade essentially sideways early next week, somewhat within the region of the gap, with the TSI drifting laterally towards the trend line drawn in red - preparing for the breakout.
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And finally, let's have a look at the Global X Silver Miners ETF (SIL). My impression is that of the four charts, SIL has clearly been the strongest.  I base this impression on the degree to which the TSI has been able to sail high above the ZERO crossover line.  It would do me well to rebuy SIL when the next breakout is confirmed. 
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The same dynamics as the other charts are in place; the impossibly steep sloped TSI trend  line that will be bullishly broken with a single strong day, the open gap just above a significant layer of support and a TSI that could well turn north without even crossing below ZERO.
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With gold, silver and their miners all saying the same thing with their charts, I think when one breaks they will all break within a matter of a day or two.  That would be an excellent time to load up, in my opinion.
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My TSI Trading record has not been updated as I am having 'technical difficulties' with getting it uploaded to the website.  Google keeps giving me an 'Error 400' message and I may have to redo the entire thing....perhaps break it into several smaller web pages.  Darn it.

6 comments:

  1. John - Perhaps I just need some more coffee, but I could not tell if you feel the gaps you mentioned will be filled. This is no small issue since if they do, the remaining downside will be significant.

    Also, did you notice the falling prices in almost everything? PMs, all other commodities, even the $. As for the 30 year bond, looks like toast to me. What do you think?

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  2. Hi John

    Just want to let you know that I have learnt a lot from your site and many thanks for your insights.

    I was wondering what are the odds of USD rallying again that will postpone a buy signal?

    Greg

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  3. Rick - if it turns out that GLD filling its gap on Friday was the end of this shake out, then of course I do not think those gaps on AGQ, GDX and SIL will be filled. And if GLD simply trades within the confines of its closed gap for a day or two or three, it is also hard for me to imagine that the other three gaps will be filled.

    Greg - and thank you for the appreciated compliment. I really do not have an opinion as to what the USD will do in the immediate week. Sometimes Greg I just put blinders on to all the noise, what ifs, news and such, and just focus on what the TSI is telling me. This is one of those times, for better or worse.

    In any event, if I am wrong no harm will be done to those waiting for a BUY signal. They simply will not get a BUY signal is all. And for those already with positions in place, starting with and including myself, that's just the way it goes.

    If you have studied my record you have noticed that I rarely sell a precious metals related trade for a loss. Why? Because I believe that the secular bull market will correct my timing mistakes if I am patient. ie. all positions will become profitable if one waits patiently. If I am wrong about this week, I have already determined in my mind that I will hold all that AGQ I bought last week until I can sell every single share at a profit. And I will.

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  4. Only thing I would like to add is a negative divergence on the peaks of the TSI for GLD.

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  5. J -- thanks for your comment as it sets up the potential for a 'teachable moment'. All 4 charts, btw, have what I view as a negative divergence in place, not just GLD.

    I generally think of a negative divergence between the movement of price and the underlying momentum indicator (TSI) as representing a situation where price will then be REQUIRED to correct - to 'pay a price' for having gone ahead of the indicator.

    Every once in a while you will get a couple of negative divergences before hell is repaid, like the setup preceding the SPX mini-crash last April. But usually, a single negative divergence does the trick of forcing price to correct.

    Once price pays for the negative divergence (corrects), it is free once again to do whatever it wants. The vicious sell off we experienced on Friday forced AGQ, GDX, GLD and SIL to 'pay a corrective price'. And these guys may see a brief continuation early next week, but when they feel like they have payed enough, a single strong up day will push them up through the TSI trend line and they will be good to go...as high as they like.

    The negative divergence, btw, is what gives us our two points on which we draw our TSI trend line. I think of this particular setup as being like a guy looking back over his left shoulder. There he sees what has been and at the same time he finds the line to break that will define a bullish future.

    So, the negative divergence, while once bringing headache and discomfort with price correction, becomes a source of joy when used as a bullish trend line break.

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  6. This charts says WAIT

    http://www.google.com/finance?chdnp=0&chdd=0&chds=1&chdv=1&chvs=Linear&chdeh=1&chfdeh=0&chdet=1289857617822&chddm=25415&chls=IntervalBasedLine&cmpto=NYSE:UUP&cmptdms=0&q=NYSE:GLD&ntsp=0

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