Sayonara, I Wish. Gentlemen, Start Your Engines!

Sayonara to the mess Japan is making, I wish. The volatility being unleashed on the world financial markets from Japan's most recent decision to print away their ails (on top of the insane degree of QE everyone else has been doing) is giving us all one heck of a head-ache. The volatility affects everything - Japanese bond trading has been halted repeatedly, the Nikkei drops 1,500 in a single day, interest rates are spiking higher, and for some mysterious reason, precious metals are continuously under pressure.

Grab a glass of water, perhaps an aspirin or two and pull up a seat. This post will show you why there is good reason to start your engines in preparation for getting the green light from precious metals and also why the stock market is not likely to crash ... just yet. 

Our charts will include the US Dollar (DX), the E-mini S&P 500 Index futures (ES), followed by gold (GC) and silver (SI).

Let's begin with a look at the precarious position the US Dollar (DX) has found itself at the end of today's trade.  

As you can see from the daily chart below, the dollar has formed a megaphone topping pattern. The increasing volatility within the megaphone pattern eventually creates a sense of uncertainty, leads to profit-taking, and deters some of the bulls from making any further commitments. The bears will eventually triumph.

Click on any chart to ENLARGE

Yesterday's volume traded 70,789 contracts which is an all-time record. Today's volume of 61,583 was not terribly fall behind. Generally, when there is high volume and price is not going anywhere, this is a massive distribution of shares from strong hands to weak.

As I assume the dollar's megaphone top pattern will resolve with downward price movement, that should help sustain the S&P 500, which we will look at now.

Below is a daily chart of the E-mini S&P 500 index futures (ES) showing a span of over 3 years. Actually, it is the same chart glued together 3 times, but each time the indicator below price is changed.

The custom indicator below price is something I made quite a while ago to show me the percentage to which price is either above or below a particular moving average. The first indicator looks at the relationship of price vs. 200 ema, the second chart considers the percentage that price is either above or below the 100 ema and the third chart uses the 50 ema.

On the far right of each indicator is a 1 (aka red horizontal line). If the price of the S&P 500 is exactly on the moving average the indicator will have the value of 1. If the price is 5% above the moving average the indicator's reading will be 1.05. Likewise, if price is 5% below the moving average the indicator will read 0.95, and so on.

I like this indicator because it can be easily used to determine just how out of line price can get above or below a particular moving average before it is typically forced to revert to the mean. For example, over the past 15 years the daily S&P 500 has only rarely reached 12% above the 200 ema. (We reached that last week on Friday).

But for this post we will look at the incredibly powerful technique of using this indicator's information for BUY and SELL signals by drawing trend lines on the indicator itself (exactly as I do when using the True Strength Index (TSI) indicator). Where these trend lines break is usually a very good location for a change in price trend direction.

For the fun of it (mostly my own curiosity, that is) I am showing this technique on three moving averages to show their differences. Each is equally accurate it appears, though the shorter the moving average length the more signals are generated. That does not surprise me at all ...... and also explains why I prefer to use TSI (7,4) than TSI (25,13), for example.

Back to the ES chart, the current blue trend line drawn on all 3 charts shows that we are not ready to crash....yet. But when that indicator slices down through the blue trend line, look out below!

Moving on to a weekly chart of gold futures (GC) we have an updated look at that incredible TSI compression that has been building for 8 months now. Start your engines and keep them running. When this spring is sprung you will want to be strapped in and ready to launch.

The purple dashed trend line that has been defined in earlier posts is still in place. It's taken a couple of punches, but still standing firm.

The daily chart of the gold futures (GC) shows a series of BUY and SELL signals I drew using the trend line break technique. And look what we have now ... a BUY signal! (position foot on the gas pedal and eyes on the lights....red red yellow yellow green green).

And finally to silver, which is looking real good at this point!

The worst is over and it's about to get real fun!

John
tsiTrader@gmail.com