Wednesday, May 11, 2011

The Plot Thickens

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This post will begin with a look at the movement of the US Dollar today, then gold, silver and the HUI mining index, and finally leave you with a laundry list of trading ideas.
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When I got up this morning and looked at the US Dollar I had good reason to believe we were in for a powerful rally. I wanted to make a chart and tell people thinking about going long the precious metals or their miners to think twice, but I simply did not have time. I have to be at work when I have to be at work and there is no negotiation on that fact allowed.
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Click on any chart to ENLARGE
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This is a one hour chart of the US Dollar Continuous Contract (DX). Three things caught my eye as I quietly said, "oh-oh", to myself.  First, the True Strength Index (TSI) indicator had made a bullish positive divergence overnight.  This occurs when price continues to make new lows but the TSI makes a higher low. It is an excellent buy signal. Second, I saw a 3 day long descending trend line on the tops of the previous TSI highs that finally torpedoed into a rising TSI, thus yielding the bullish trend line break BUY signal.  And third, the TSI was just crossing above the ZERO line - giving us a third BUY signal.
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And as you can see from the chart, the buck rallied up +0.70 in a single day, and that is a strong rally indeed. Gold and the stock market indices were off around 1%, but silver really took it hard - down 8.60% in a single day.
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Well, here is where the plot begins to thicken.
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This is a daily chart of iShares Silver Trust ETF (SLV). It turns out that today's drop came within just 58 cents of retesting SLV's recent crash low. But notice the TSI reading. It has strengthened significantly in the past 4 days.  So much that if SLV were to trade just 58 cents lower, a bullish positive divergence BUY signal would easily be generated.
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And the plot gets even more interesting when you see the status of the Amex Gold Bugs Index (HUI--X). With today's sharp selling, HUI does not need to drop any further to generate a bullish positive divergence BUY signal. That's because it is already giving that signal with today's price action.
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OK. So does a bullish positive divergence mean 100% of the time that the stock or ETF will rise the following day? No.  Does anything have a 100% guarantee in the stock market? No. But I'd say the odds are about 80% yes/20% no that miners rally tomorrow. And if that happens, it just may be enough to kick off a TSI trend line break BUY signal on things like GDX. 
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Oh, and before I forget, here is the laundry list of stocks that, like HUI, finished today's trade with bullish positive divergence BUY signals:
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ABX, AEM, AU, AXU, CENX, CGR, CLF, DNN, DROOY, EGO, GBG, GDX, GFI, GG, GMO, GRS, KBX, MGN, NG, NGD, NSU, NUGT, SA, SIL, SLW, SRCH, SSRI, SWC, UXG and VGZ.
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18 comments:

  1. GREAT post, John. My cruder TA was telling me the same thing. THANKS!

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  2. John: What did the TSI say about gold?

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  3. Daily TSI on GLD reached -0.04 yesterday and fell back to -0.07 today. The implication is that GLD is close to the ZERO crossover and a solid day would do it. GLD is still considerably above its crash low, so no positive divergence likely there tomorrow.

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  4. John,
    Just before I read your latest blog here tonight, I was on FreeStockCharts and noticed the same thing you just mentioned... positive divergence on SLV. But, also take a look at the derivative oscillator and the SMI ERGODIC oscillator 15 min and 30 mins. Nice divergence.
    They also called the sell off.

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  5. Holy Buckets, Monty! What are the derivative oscillator and the SMI ERGODIC oscillator? Are you guys having a "post-doctorate" TA session over here?

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  6. John,
    Gary is out now and went to 100% cash, as you know he thinks we are in the D-wave, boy that final C-wave move sure disappeared in no time .Just a week or so he was screaming how the final C-wave was almost here.
    I would assume you don't agree since the TSI has flashed buy signals,
    So what is your take is it now over for gold or are we headed higher in the near term .C-wave or are we now in the D-wave where gold/silver are expected to pullback big time

    Robert

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  7. Thanks, John, for the "gold read".

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  8. Bob - I am in all cash and focusing on surgical strike trading while I see how this C/D-wave thing shakes out. I usually do at least a couple trades a day with the /DX. Lately, I have also traded options on HL.

    I am not always able to see the big picture as well as others but I usually do fairly well with trading what is right in front of my nose. So that is what I am doing for now. Just trying to nickle and dime a string of low risk high probability trades together and chip away at my game. Sooner or later the big picture will be easier for me to grasp.

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  9. Hi All,


    Just thought id let you know armstrong wrote a latest piece on silver suggesting it may correct to 28 dollars, which is major support.

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  10. John,
    I'm still holding SLW,AZK,GPL,CDY,VGZ,HL,EGI,and NGD. I generally don't use stops, and was out of the country during the initial correction. I've been waiting for a bounce back to bail out of some of them, Tue. afternoon I was looking at the TSI for most of them, and it looked like they were getting close to buy signals again, so I held off. Now I'm wondering if I made the correct move. Do you think a bounce is coming, if so when, or just more blood?
    Thanks
    Harry

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  11. Positive divergence still in play plus trend line break on SLV as of Fridays close. Hope we continue higher. I'm looking to unload my silver with a tag of the 50 day MA or TSI trend line break if we can go up from here.
    Tsi still at -.38 though.

    What do you think of the plan John, any advice for someone still holding onto a couple of positions in silver?

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  12. John: You said in another thread that you get TOS for free. How do you do that? Do you just open a nominal brokerage account with Ameritrade and leave $100 in it?

    Thanks!

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  13. Hi Spidey - now that I think about it, I still have AGQ and SLW in my retirement account. Yikes! I don't have a plan other than to push the sell button, ASAP.

    jhn - My recollection is that you have to jump through a hoop or two to get an assigned username and password, but once that is behind you it is a matter of going back through the front door, using those items to log in and then you can download the software. I have never funded an account there.

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  14. Good morning John,

    Did some fishing and wanted to get your take on the following set ups:

    QID & DXD.

    Both appear to have a trend line break with a zero line crossover.

    I guess I am a bit nervous about these two b/c they have been trending lower for a while.

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  15. $$$ -- Good Morning. That is some fine bait you are using, btw. Nice Catch!

    I do see exactly what you are talking about. Looking at price and the TSI daily over months indeed gives one pause for caution, otherwise the setup looks quite ideal.

    My hunch is that the Dollar gets pushed down one more time this morning and then resumes it upward trajectory. If true, your fish will swallow the hook and break out convincingly later today or tomorrow.

    Your trade idea is one that I have had in mind for several days now and, like yourself, have been eyeing with respectful caution. I am going to continue to exercise restraint but confirmation that the house of cards is going to fall will bring some swift action. Once these stock indexes begin to fall I suspect they will fall hard.

    Good luck to you and to me.

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  16. Ultrashort on the Nasdaq and Dow! Very likely. With the end of QE2 looming large, it would be difficult to think otherwise.

    I dumped all my long positions two weeks ago. Short, cash or short ETF's make a lot of sense right now, especially with the metals moving into consolidation.

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  17. $$$ & John,

    I'm seeing the same trade, though you guys prolly don't need confirmation from an amateur =P

    Thanks for the trade ideas, I'll be nibbling on both. Would like to hear when you guys exit if possible

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  18. Spidey,

    FWIW, I did not take the trade in DXD & QID, even though today the TSI has crossed up through the trend line and the zero line on the both charts.

    Since both the DXD & QID, as I am sure you know, are ultra inverses of the Dow & Nas respectively, I felt that they are due for a daily cycle bottom any day now. (I have the Dow at 40 days and we typically see a bottom every 35 - 45 days)

    Today saw the Dow tag the the February pivot and just about tagged the 50 MA and has bounced.

    I will be watching this develop. If this is not a daily cycle bottom, it must be close.

    I plan to watch for a daily swing high and then reevaluate.

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