Saturday, May 7, 2011

True Strength Index (TSI): Gold, Silver and Miners Update

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Now that gold has taken a well deserved breather, the silver parabolic has popped and the miners have shrugged their shoulders for the past 4 weeks (as though not interested in the slightest with the excitement of their volatile mentors), I think this is a good time to review how the True Strength Index (TSI) indicator has performed recently and see what it is telling us about what comes next.
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Before we begin that review, let me acknowledge that I really do not know if the C-wave for gold is over.  If it is not, perhaps the miners will finally get off the bench and run onto the field.  But silver, in my opinion, has popped and I cannot fathom another immediate parabolic rise for it. Certainly it should retrace some of its fall soon, but I doubt it makes more than a full retrace to near $50.
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I also wish to acknowledge that not only am I human, but that the TSI indicator is a "far better man than I". As we will discover, it performed its job of calling the buy and sell trades with uncanny accuracy. And I cannot say the same of myself, by a long shot.
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Let's get started with a look at the weekly chart for that little trouble maker, silver. 
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Click on any chart to ENLARGE
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The top portion of the graphic is the chart I posted on Sunday April 10. The bottom portion is a look at weekly silver from today's vantage point.
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When I wrote this post I was trying to figure out how much longer until the silver parabolic would explode. Using the TSI readings at previous silver parabolic highs as my guide I extrapolated that the 2011 parabolic would explode when the TSI reached approximately .90 and in a range of 3-5 weeks from April 10th.
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The lower portion of the chart shows that indeed, the TSI peaked with a reading of .91 after 3 full weeks.  The TSI nailed it and to tell you the truth, I did not even notice. I was not paying attention. Go figure.
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Scorecard:  TSI 1  John 0
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Now let's see about the daily chart of silver. The top portion of this graphic was posted along with my dialog regarding pre-market activity on Monday April 25th. I dutifully noted the exhaustion gap on the 1 hour view of silver's activity and the possible reversal candle in progress on the daily chart.
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The True Strength Index performed beautifully with a precision timed trend line break SELL signal AND delivered a negative divergence SELL signal as a bonus.
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The lower portion of the graphic is today's view of the rocket ride. The four hour chart on the left side gave us 3 clear SELL signals before the real carnage began. The daily chart on the right gave us 2 excellent trend line break SELL signals in addition to the obvious negative divergence signal.
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Hey, it does not get any better than that. I mean, unless this indicator has the ability to just place the trades for me, what more could I possibly ask for?
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Over the years I have studied these TSI setups for hundreds, if not thousands, of hours. So when I saw this in real time, I knew what I was looking at.
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But curiously, I did nothing. Not that there was much to do because I had already sold out my positions. But I guess I could have shorted silver, or something.
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Scorecard update:  TSI 2  John 0
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Well, let's see what was going on with gold as the silver show took center stage. The top portion of this graphic of weekly gold was presented with my post of April 10th. Here again I was trying to assess the TSI data which included all previous C-wave tops and see if I could find some clues for when and how the current gold C-wave would conclude.
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Four of six previous C-waves concluded with a weekly TSI reading of .80 or higher.  Good evidence, but not conclusive. All six C-waves did conclude with a trend line break of the TSI indicator, but I presumed that was kind of a given.
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The lower portion of the weekly gold graphic shows that gold's TSI reading did top above .80 last week (.84) and that gold came tumbling down with a trend line break of the TSI indicator.
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Also, it is notable that most sky high "nose bleed" TSI readings result in a complete break down in price. (See blue rectangles for examples). But price does not always break down, as you can see.
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For now I can say that the TSI is falling and above ZERO - and that, by the definition of how the indicator works, means price is either consolidating sideways or falling.  Clearly price is falling of late.
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However, any time the TSI turns up when reading above ZERO, it means that price is absolutely rising. It is indeed possible, if not likely, that after such a vicious sell-off price will rise and, of course, the TSI will rise as well. It's something to keep an eye on going forward as a BUY signal.
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Scorecard for this round was a draw.  Now the score is:  TSI 2 John 0 Draw 1
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And finally a look at those fast asleep miners. The top portion of this graphic was published with my post on Monday April 18. I noted the timely TSI BUY and SELL signals of previous trend line breaks and eagerly looked forward to a HUI performance to equal that of 2008, if not rival that of 2006. The TSI showed that we were, on April 18th, on a SELL signal and I surmised that the BUY signal would take its turn at the plate next.
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Well, guess what? The TSI has still not given us a BUY signal. And looking at price movement since that date I'm kinda glad it didn't.  Score another TSI point for keeping us out of miners and one point for my following directions (for a change).
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Final Score: TSI 3  John 1  Draw 1
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Now here is the situation with the miners. When the TSI is as deep below ZERO as it is now, a trend line break with some measure of consequence is not necessarily imminent.  But at present something close to 95% of all miners have a current TSI reading that is BELOW ZERO. That is incredibly oversold and mark my words, you will get a bounce in this situation. But as I attempted to show with the use of blue rectangles in the lower portion of the graphic, a bounce does not necessarily mean a rally. It can just as easily mean a bounce and more downside and pain. Hopefully the green trend line I have drawn is decisively broken by the end of the week. Even better if the TSI then rises and makes a ZERO crossover into positive readings.
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So the TSI beat me 3 - 1. That's both disappointing and encouraging. Disappointing because I realize my experience has not yet caught up with my knowledge. But encouraging because I am positive I have a great trading tool I can get better at both understanding and using for trading success. And I will do all that I can to help others use it, too.

24 comments:

  1. fantastic post as usual john, i got careless and lost most of my fiat in forex xag/usd without looking at the TSI right before!

    thank you though for shining the light on the TSI it really is uncanny

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  2. John,
    The trouble I'm having figuring TSI out, is how to draw the trend line break. It's all dependant on how you draw your lines. For example the Daily chart you have of HUI-X, You have a trend line drawn from a peak at around March 18 to April 26 for a sell signal. But you could also draw that line from March 18th, to a peak at April 18th. It would have given you a sell signal around April 25 verses May 2nd.
    Also the next buy signal you have drawn from, a peak around April 8th to April 29th. You could have drawn that line from April 8th to April 21st. which would have given a buy signal on April 28th.
    So I'm just a little confused on how you pick your peaks to draw your trend lines.
    Thanks again for all your help.
    Harry

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  3. John -- Thanks very much for this post. A very thorough and insightful analysis, and much appreciated.

    Cheers!

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  4. IAmPhoenix - I completely understand what you are saying. Oh, do I understand!

    jhn - thank you. Believe it or not, I spent about 14 hours yesterday on this little post. If the take away is that some readers appreciate that the TSI works and further learn how it works, my investment in time has been validated.

    Harry - great question. I carefully considered your thoughts and fully understand what you are asking. My response may surprise you and I am sure it will be a benefit to you.

    The inventor of the True Strength Index, Wm Blau, had a strong preference for setting his indicator to (25,13). He also usually used a moving average thrown on the TSI and suggested one trade the crossovers of the moving average with the TSI signal line.

    If you now will revisit the HUI daily chart, set the TSI to (25,13) and put a moving average (add indicator) of 5 to the TSI, you will see something very interesting. On April 12 the TSI signal line crossed down through the 5 period moving average..... and it has stayed below the moving average ever since. This SELL signal has been in effect for some 4 weeks now.

    When a person uses the TSI set to a slower magnification, such as (25,13), one gets a more TRENDING view of price movement. Setting the TSI to a very fast magnification, such as (7,4), gives one the advantage of faster (more timely) signals but has the disadvantage of being susceptible to being whip-sawed.

    Several years back I started with the TSI set to (25,13). One day I got the bright idea to see what would happen if I cut those numbers in half to (13,7). Wow - I got the same signals, but sooner. Then I added a third TSI indicator panel and cut that magnification in half again to (7,4). Wow Double Wow - I got the signals even faster. Like driving a Porsche instead of a VW.

    It made me uncomfortable, to tell you the truth, because going that fast meant that I would have to be super alert to react appropriately to the whip-saws. It took me a couple years, at least, to get used to the speed and be comfortable with it. But it's OK now.

    I have virtualy abondoned the (13,7) magnification, but I frequently keep (25,13) on my screen to keep my sense of balance and perspective centered. And if one prefers to swing trade as opposed to day trade, the (25,13) is absolutely the way to go.

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  5. I agree with honus. There is much room for whipsaw errors in your fast TSI. I can see no objective way to know in advance that the mid and late April humps or peaks in the descending TSI of the HUI were not legitimate buy signals instead of mere bumps to draw trendlines on. That became apparent only after the price descent continued. I find the TSI helpful but no panacea. It works great when all prices are strongly trending, but almost any indicator works great in that situation.

    We need a way to know a way to identify the turns in the TSI which are mere speed bumps when they are actually happening. I try to do this by combining the TSI with price moving average crossovers and volume analysis. Again, if you just follow the TSI shouldn't you have assumed the HUI upturns in the TSI in mid to late April were buy signals? If you knew when they were happening, John, that they were not legitimate buy signals, how did you know? I can see it in retrospect only.

    joe

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  6. Hi Joe - thanks for sharing your thoughts and questions. I actually agree with most of what you wrote, btw. And in any event, I am very pleased to learn that you are using the TSI, find it helpful, and have found creative ways to cross check its signals with price moving average crossovers and volume analysis.

    The point of my blog is to encourage and assist people in using the TSI to successfully make money in the stock market and you are among those who have taken the time to listen and give this indicator a good hard look. Honestly, I view your success as my success, and I thank you for that.

    Did you have a chance yet to go input the TSI (25,13) with a 5 dma moving average on the indicator, as I suggested to Harry? If not, I hope you will give it a look on the HUI daily chart.

    You questioned whether there is an objective way to know in advance whether the mid to late April TSI (7,4) high points were legitimate buy points. My suggestion to Harry is also my answer to your question.

    Which is to say that if one is concerned about only taking trades at swings, this is the objective way to know in advance whether the TSI (7,4) signals are mere speed bumps - in real time - or legitimate buy signals, as you have referred to them.

    Joe, is the TSI a panacea? Nope. Is anything? Nope. We agree. Can the TSI help stack the odds for success hugely in your favor? Yup. Enough in your favor to beat the market? It has for me. And it can for you, too.

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  7. John, thank you for your report.
    May I ask, how are you going to play the d-wave? If you have some specifics, I'd appreciate it :o)
    Eamonn

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  8. Hi, John - thanks for the comment about the TSI set to (25,13) because I feel a little more comfortable holding long term positions. I have made some good profits from hold some mining stocks for 1 to 2 years but have not traded much. Only recently with the way mining stocks have performed and coming across your site have I been wanting to start trading a portion of my portfolio.

    So to pinpoint a buy could you look at the TSI (25,13) on a daily chart for a general buy point and then start looking at the TSI(7,4) to narrow down and then narrow it down even further to the 4-hour, 1- hour and even 30 min charts to pick a buy point? Is this a good approach?

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  9. Dear John,
    The four-square charts on silver futures which showed different expiration months and different magnifications of TSI brought it all home to me. I have been lurking for many months (since your "Gold Secular Bull-C-wave...) posting and have been following your best guesses of the mining, physical and futures markets, and giving you the "benefit of the doubt", but now I'm ready to set up my own charts and play around with the trend-lines. Thanks for the commentary. It's been fun. Now I'm signed up for email notification of your posts.

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  10. Eamonn - I have no specific plans for trading the D-wave. I recently discovered NUGT and DUST and will see if I can get a read on hot to trade them. And I will be keeping an eye on AGQ/ZSL and DGP/DZZ.

    rckt - your approach sounds like my approach and I hope it's a good one! This summer when I am on vacation and can watch the markets all day I will get things down to the 1 hour and 30 min level, but for now that isn't possible (nor terribly important - though it is fun).

    theworld - I am terribly behind in my email notification program and hope to get that straightened out this summer, as well.

    Please let me know if you run into a snag getting your software set up, and always feel free to email a chart or two to me with your TSI thoughts. I enjoy pondering those challenges and can usually find things for you to consider so that your TSI skills will sharpen more quickly.

    And yes, those silver charts I posted pretty much spoke for themselves. When seemingly everyone could not figure out what was happening (starting with myself), the TSI performed brilliantly....again. The trick is to learn from success to trust it. I'm working on that.

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  11. John, how do you save the spreadsheet? I'm a newbie just getting started.

    Thanks,

    FM

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  12. Hi FM - not sure I understand your question. Do you mean how does one save the spreadsheet that details Tomorrow's Trades (Today!)? Or is there something else you are referring to as a spreadsheet?

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  13. Yeah: "See previous trades-detailed spreadsheet data."

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  14. FM - beats me, honestly. You can save the link and access the spreadsheet 24 hours a day 7 days a week. Or you could use a free software program to make a screen shot of the spreadsheet and save it as a graphic file. I don't know of a way to actually save the spreadsheet on your computer. But I will brainstorm more with you, if interested. What would you like to be able to do with the spreadsheet?

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  15. John: you said that "this little post" took you about 14 hours of work. I can well believe it. It is filled with insightful analysis, and thank you again for sharing all your hard work with the rest of us. It's very helpful.

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  16. JHN - I appreciate the time you took to give me some encouragement. Thank YOU.

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  17. John, thanks for your reply. I very, very much appreciate your efforts here and you have helped me much. By the way, I find in my use of Freestockcharts.com that sometimes the TSI indicator for a particular stock in a particular time frame (such as 4 hours or 30 minutes, for example) will simply not paint on the screen for one whole day. It will appear if I change the stock or the time frame. This has led me to use the SMI Ergodic Indicator which makes a rising and descending indicator which looks exactly like the TSI indicator if you adjust the parameters correctly. It never disappears. I mention this only because it occurs to me others might occasionally have disappearing TSI indicators as well.

    By the way I have tried many indicators on the Freestockcharts web site, and only the TSI occasionally refuses to appear.

    joe

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  18. Thanks Joe for updating me. I was sincerely hoping you would look carefully at what I had written and give it your full consideration.

    The Stochastic Momentum Index (SMI) was invented by Wm Blau, who also is the inventor of the True Strength Index (TSI). In fact, the SMI is actually the TSI with a moving average thrown on it. Nothing more. Your observations were right on the mark.

    And yes, I have had very random and infrequent issues with the TSI not showing up at FSC, but had not thought to just substitute the SMI on these occurrances. Great idea Joe! Thanks.

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  19. Hi John,

    good to see Hecal recover today some bit on good earnings and yea u are right, the miners will start to move sometime, could be a great opportunity when the A wave starts..

    Jack

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  20. John,

    Looks like the HL calls are doing okay for you today! First time I've seen HL outperform SLW by this magnitude in some time. We'll have to see if it's moving at this point based upon the oversold levels or the possibility of portending a broader miner rally. SLW's slow stochastics are embedded on the downside after a par-for-the-course earnings report with below average volume for the day. Hard to see the HUI doing anything as a whole here without some serious juice from the underlying metals.

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  21. John: I believe you have TOS and Interactive Brokers. Could I ask you what you think of them? I'm looking for a live charting service and a broker, and would like to know. (I had TradeStation for about 3 months back in 2008 or 2009, and liked it, but am willing to consider others.)

    Thanks in advance for any feedback you could give me. Is TOS reliable? Or does it break down a lot?

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  22. jhn: Yes, I have TOS and IB. My experience with TOS has given me incredibly reliable service. I can't think of a time it broke down, in fact. And it is free. I had eSignal for several months a year ago and did not like it as well as TOS, as a matter of fact. TOS also has a lot of indicators that I find useful or fun to tinker with. As for Interactive Brokers, I have had smooth service for about a year now. No bad experiences to report. Add in FreeStockCharts which I use in addition to TOS, and I am a content camper.

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  23. John,
    wondering what you are seeing in Silver now. long consolidation period? further down? or do we go up from here?

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  24. Hi Sierra - Honestly, I have not put a lot of study into that question lately, but my hunch is that silver is going a lot lower than where it is now around $35. Other than for a day trade or something, I am not the slightest bit interested in buying silver for a longer term position.

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