Saturday, July 30, 2011

Caution Advised - Gold, GDX, AGQ, TLO, TMV and URE

Trying to make complete sense of what is going on in the markets right now is nearly impossible, at least for me. But I do envision 'things on the horizon' that could well become reality and I dare say they are quite contrary to what appears to be true at the moment. In two simple words, I think 'caution advised' is worth our consideration and if you read on I will show you why I think this is true.
This post will look at gold, the miners and silver, but stray a bit and also consider the bond market/interest rates and include real estate. The conclusion of my analysis may leave the reader with the notion that a period of deflation in all asset classes is likely before us. Or certainly, that an upcoming bout with deflation is a very good possibility. I will tell you right now that this is my concern and again assert, 'caution advised'.
Let's begin with this look at the weekly chart of the World Gold Index (XGLD). I have used the 40 weekly moving average as a proxy for the 200 dma. The calculations above price are the approximate percentage that price was able to achieve above the 200 dma since the previous C wave top of 2008.
Click on any chart to ENLARGE
At this time, a price of $1665 would place gold about 15% above the current 200 dma reading. This, along with gold being on Day 20 of its 20-25 day daily cycle, suggests to me that gold is due for a pull back and soon. The True Strength Index (TSI) indicator looks fine, as it is rising above ZERO. A few weeks ago it made the bullish ZERO crossover and a trend line break BUY signal followed.
Possible conclusion: gold is due a correction based on its daily cycle and possibly a large correction due to its height above the 200 dma.
Moving on to a daily chart of Market Vectors Gold Miners ETF (GDX) will begin the analysis that suggests much more caution. First, we note that on this past Friday the 200 dma fell for the first time in over a year, and observe that about 6 weeks ago the 50 dma bearishly crossed down through the 200 dma. Neither of these technical observations are bullish.
Second, we note the clear trend line break SELL signal given by the TSI well over a week ago, and the following bearish negative divergence price action that yielded another SELL signal. At present, the TSI is in free fall BELOW ZERO, price has closed below the 200 dma and there are no TSI BUY signals remotely imminent or possible at this time. Add to this the fact that gold has been rising while the miners are falling, and well, something is not right.
OK, so let's have a look at the weekly GDX chart now.
There is no other way to characterize what I see than to refer to it as scary. Our current situation is eerily similar to that which existed in later 2008 - just before the gigantic deflationary meltdown. I have hand drawn a possible TSI future path that is identical to 2008. In my opinion, we truly are on the cusp of something big and my guess is that it is something both big and unpleasant.
The TSI was brilliant in spotting the top of the silver parabolic last April. Too bad I did not completely believe all the SELL signals it gave me on the daily, 4 hour and 1 hour charts....but they were all 5 of them!
Well, here is a daily chart of Proshares Ultra Silver ETF (AGQ) and maybe I would do well to tell you what the TSI indicator says. It says SELL.

I would imagine that if the markets are going to enter a deflationary episode, everything, at least initially, is sold in panic.  Stocks and miners, of course.  But also gold and silver. And even bonds. Everything gets sold in one of these deflationary melt downs.
So let's turn to a couple of charts relating to bonds and see how they may be positioned for future movement. This first chart is a weekly of SPDR Lehman Long Term Treasury ETF (TLO).
An investor may wish to own TLO if they think long term treasuries/bonds are going to rise in price. But that negative divergence in the TSI tells me that the next likely direction for this ETF will not be up. Rather, it will be down.
And here is a look at an inverse ETF that goes up in value if bonds fall in price. This weekly chart is of the Direxion 30 Yr BEAR 3X (TMV).  At present the TSI is set up to behave exactly as it did last Sept/Oct.  That is, bounce off a positive divergence and make those who own it about 60% richer in 3 months.
And finally, this look at real estate. As I wrote earlier, in a deflationary panic/melt down everything, all asset classes, get taken down and taken down hard. After you take a look at this weekly chart of Proshares Ultra Real Estate ETF (URE), could you keep a straight face trying to argue why this security should survive a stock market melt down?  I know I could not.


  1. Scary times ahead.
    I think that once this fiasco is settled in District of Crookumbia, there will be a short rally and then reality will set in.
    Unless they pump more and more...

  2. John, I saw this same pattern in SPY awile back and made some good money on puts. The whole setup was too logical to pass up. Before I but anything now I check the weekly,daily,4 hr., 2 hr. and 1 hr. TSI to see was situation any stock is in and have been ave. over 25% gain on my option buys. Thanks again for what you do.

  3. thanks for the heads up.. /SI has the same neg divergence as AGQ

  4. good evening john,
    I'm glad I checked your web here before turning in. I've been getting a little bearish past couple days. Now that I've read your latest post, I'm getting even more so. Let us know if you take a position in any of these. I myself like DZZ. I never thought about the TLO or TMV. M-

  5. Hi John
    Glad to have you back. Thank you for your above analysis. What is you opinion/ analysis on ZSL and DZZ in the coming deflationary period. Is it the right time to invest in ZSL/DZZ.
    Please advice.
    thanks for your great work.

  6. Wellcome back John, sounds like you had a great holiday. WE missed you, superb reports to kick off with. Do you think tsi analysis of the dollar supports your work and do you think it bears any relationship to the pre 2008 deflationary period. Thank you so much for all your guidence.

  7. MrMiyagi - The other day I read a commentary that suggested the politicians were needing a pre-decision melt down in the financial markets to get motivated enough to provide a settlement. And this, to their dismay, as not happened...yet. Everyone is so confident they will not do something completely idiotic that asset prices have remained relatively stable.

    GaryH - I am very pleased you have found a disciplined and effective strategy for using the TSI on various time frames. Your success I consider my success and I thank you for sharing your success with me.

    IAmPhoenix - hey dude. There is a huge positive divergence on ZSL now and the TSI is nearly back up to ZERO. Price needs to move a few ticks higher and it would break up through its down trend line.

    Hi Monty - there is no way the US escapes this circus with asset prices rising. Sure, maybe a rally that smart money unloads into, but beyond that what fundamentals suggest higher prices? Any agreement reached will certainly include cuts in gov't spending - and one way or another that means both further job losses and an even weaker economy. I included the bond market and real estate charts in my post to alert us to the money making opportunities that would present themselves should interest rates also begin to rise.

    Anon - and I am glad to know you are back, as well. Nothing so discouraging as making all these charts and writing the dialogue and then no one finds it useful.

    I do my pondering and analysis and in an hour or less I have things figured out about as well as I am able to figure. And that is good 'for me'. But then it is many hours of work to go beyond that and try to make it good 'for someone else'.

    Honestly, I am guessing the odds are very good that a deflationary period is coming. But I do not know that. *If* this is how it turns out, then ZSL and DZZ will appreciate. And if history is any guide, DUST and shorting the miners will do exponentially better.

    Caution advised means do not invest in anything right now. Don't become a gambler. There will be plenty of profitable trades with much less risk after the big players get the ball rolling in one direction or the other.

    Trevor - interesting question and I just looked at the weekly chart going back to 2007. In March - July 2008 the dollar essentially based (went sideways). Beginning the first week of August it screamed higher and did not peak until December. The TSI dutifully hovered just above and below ZERO as price consolidated and just one week before the big break out occurred, it gave a trend line break BUY signal - which was deadly accurate.

    Our currect situation is very similar. The consolidation is a bit shorter and the TSI, while near the ZERO crossover, is not signalling a trend line break. A modest rise in price would put it at the starting line. A sharp rise in price would signal *game on*.

    Again, the lack of confirmation at this time is why I think 'caution advised' is a better position that 'bet the house'.

  8. Dear John
    thank you for your opinion and in particular
    "Caution advised means do not invest in anything right now. Don't become a gambler. There will be plenty of profitable trades with much less risk after the big players get the ball rolling in one direction or the other."
    You are brave enough to give a straight forward guidance rather than beating around the bush.
    I always look out for your comments and analysis on daily basis and i await your next move. thanks in advance.
    all the best

  9. uncanny call my good man,

    just got word that they are raising margins on silver

    .. they are running out of ammo

  10. Wild Bill

    Right as you went on vacation you made a note of a trade in DUST. I started looking at that for a few days and saw Dust make a break back up off a -.68 low and also broke a trend line. At the same time GLD had gone up 10 days in a row and was at a peak of .84. So I bought DUST at 36.71. Now the next few days were touch and go. Gold was starting to trade up but I just kept my eye on the TSI line for DUST and it told me just hang on. Now gold and the miners to NOT trade in tandem. IT seems that they would but they don't all you need to do is look at the last week of trading.

    Well even with the TSI line still going up I chickened out and sold DUST at 40.74 Friday afternoon. After reading your post this morning I am slightly kicking myself for not hanging on but it never hurts to make about 10% on a week.

    Thanks for all of your analysis. The TSI is the way to go.

  11. on googlefinance AGQ it shows your blog post --

    ProShares Ultra Silver (ETF) discussed on blogs
    Three Ways To Play The Silver Trade Following A Debt Ceiling Deal ... - admin - Forex Technology and Gadgets - 6 hours ago

    HSBC to Sell Some U.S. Branches for $1B – Bloomberg | Guerilla ... - Business - Google News - Guerilla Stock - 14 hours ago

    Caution Advised – Gold, GDX, AGQ, TLO, TMV And URE - John Townsend - - Jul 30, 2011

    haha nice way for traffic .. question..

    is there a specific way to get posts to show up there that i can do also? or google just auto locates blogs with the ticker symbols?

  12. Wild Bill - I think you did GREAT!!! 10% / week = 520% per year

    IAmPhoenix - good heavens.....googlefinance? Anyway, my guess is that gets the credit for this. They have permission from me to take content from my feed. Contact them with your details and that would probably be all you need do.

  13. John -

    Glad you are back and that you had a great vacation - just got back from western U.S. tour myself. Couldn't beat the weather!

    If you wouldn't mind, would you please "coach" me here a little with the TSI?

    I'm looking at the daily on ZSL re: your comments above.

    It looks like the TSI made a trend line break roughly on the 19th/20th, and is/has developed a bit of of positive divergence, and it is about to make a zero crossing . . . am I reading this correctly?

    If so, in your opine, is this a "buy" signal (strong or weak?)

    Thanks . . . still learning from the master.


  14. Hi Phil - yeah, weather on West Coast was perfect. Seattle will always be my favorite place on earth and I am appreciative of the 10 years that I lived there.

    You are reading the ZSL daily chart TSI (7,4) as correctly as I know how. It is an excellent BUY signal and I personally hesitate to nibble only because I want the see and hear the other shoe drop (US debt issue and world reaction).

    Any way I look at it, however, real estate should be a dead duck and there is probably more money to be made shorting that (URE) than silver. But for now I am content to wait and see if I can get this right at some point soon.

  15. John -

    Your comments and the markets' reactions this morning to the phony "debt bill" just go to show the soundness of not relying solely on technical indicators, but instead taking all the pertinent data/situation into account (as you are clearly counseling): ZSL is off almost 5% this morning!!

    Yeah - I grew up out west, but have "suffered" through hot and sticky midwest summers and bone chilling winters for over 25 years now. Hate to say one gets used to it, but I guess we do. After I retire, I'll be moving back to God's country . . . you can take the boy out of the mountains, but you can't take the mountains out of the boy! You are right - Seattle is a great place to be.

    Thanks for the feedback . . . I am glad to know that at least I am getting the point to all of this.