Tuesday, April 26, 2011

A Game of Chess, Anyone?

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I've been anxious to rebuy some mining positions for a couple of weeks now, but just haven't seen the setup that is right for me.  We had a buy signal many days ago on the Market Vectors Gold Miners ETF (GDX) but I could not bring myself to take it.
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Click on any chart to ENLARGE
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If you are interested in pondering some of the finer skills of using the True Strength Index (TSI) indicator, this post may interest you.  I'd like to show you why I did not take a perfectly good buy signal the other day and how my decision has played out so far.
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This first chart of GDX shows where we were when the buy signal from a trend line break of the TSI first appeared on the daily chart. Not only did we get the trend line break, but the TSI was rising and clocked at -.03.  Surely another positive day would cause the TSI to rise further and generate another buy signal - the ZERO crossover!
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But like a chess player trying to think a couple of moves ahead, I noted that the previous TSI high was +.67.  And I noted that the previous high price associated with that reading was $64.14.  Hummmm......... 
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What would happen if GDX price were to rise a few points?  Wouldn't it make a higher price than $64.14?  Yes.  But would the TSI, then at -.03, make a higher high than +.67? NO WAY. 
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And if the TSI did not surpass +.67 that would surely create a negative divergene and most likely bring the Tower of Babel crashing down. Heck, who wants to buy just days in front of a crashing tower?  Not me.

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So I opted to wait.....believing the GDX would be coming back down, thus creating a much easier TSI to not only use for a trend line, but also surpass when price resumed its next rally.
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This second daily chart of GDX brings us up to date as of this morning's early trade.  Sure enough, price did rise and nearly reach the old price high.  And sure enough, the TSI at that point was no where near the previous +.67. 
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Price has recently fallen as I hoped, creating a new TSI high point from which to draw a new trend line. I hope that in addition to the upcoming trend line break of the TSI (7,4) we see a subtle change in direction from the slower trending magnification of the TSI (25,13).
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Also, the last time GDX descended to its 50 dma it was supported for a few days, before falling below.  If that happens this time, honestly, that would be ideal for me.  It would push the TSI that this morning was at -.20 all the way down to -.50 or so.  And then, like holding a ball under water, the release unleashes energy that propels the ball, or in this case GDX, to defy gravity.
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Some time ago I read that a person said, "In the stock market, there are no certainties.  Only probabilities".  And that statement struck me as very true.  There is no certainty that my chess move was the best move possible.  But I do think it has a very favorable probability. That was my move. 
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Your turn :-)
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7 comments:

  1. Great post. I'm still learning but this is starting to make sense. Maybe my CDE June $45 calls won't expire worthless after all HAHAHA!

    The thing that shocked me the most was the rise of physical silver but CDE's stock price falling. As I read some historical posts on gold-eagle.com I have come to find that this is not uncommon at all. Stocks can lag their associated commodities and then eventually catch up, and vice versa.

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  2. Love your site...still learning TSI.
    If I apply TSI on ARMH, is it a buy or not?? Thanks in advance.

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  3. Hey Adam - I have thought about you many times since you first wrote about your CDE $45 strike calls. The thing is, I really believe things will be quite different in May for the miners and your position is not going to expire worthless. I look forward to hearing how this works out for you and have no doubt you will continue to be on my mind. Thanks for writing.

    oa92000 - I took a peak at the daily chart of ARMH. TSI wise, it is NOT a buy because price has made a higher high but the TSI has not made a higher high. This common situation is called a negative divergence and though a negative divergence can do what it wants (including ignore me), it *usually* means that price has gotten ahead of momentum and price will soon pull back to get things back in balance. The stock has appreciated some 20+% in the past month or so and obviously is doing a lot right. But the current setup is prepared for a pull back, not a new spurt higher (in my opinion, that is).

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  4. Ahhhh I remember you replying to my comment about this and wasn't 100% sure what you meant. Crystal clear now, awesome usage of the TSI!

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  5. So far Spidey, it is playing to the script. I love it when that happens. But I also wanted to give interested readers an idea why I have not done any miner trades lately. Sometimes just being patient is the best thing one can do.

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  6. John,
    I stumbled upon your site and found your analysis interesting... I am a newbie and intend to spend some time learning TSI... Can you please comment on GPL and SLW charts and what do you think is the best entry point ?

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  7. Hi Anon - well I just did a new post re: my purchase today of GPL and why I purchased it.

    SLW looks like it is washed out enough that it could start roaring back any day. Confirmation to buy SLW, for me personally, would be seeing GDX, SIL and SLW give a TSI buy signal, such as a trend line break of the TSI (7,4) indicator, and I'd like to see silver done with its mini-correction and the US Dollar heading south of where it closed today ($73.77). All of this will happen and when it does, SLW becomes a no brainer.

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