Thursday, June 27, 2013

Mirror, Mirror on the Wall .... Do Tell Us What Will Happen Next

Today I was tinkering around with some of the hundreds of indicators I have built  using the ThinkorSwim platform, and I came across this one using the Money Flow Index (MFI) as its primary engine. What caught my eye was one of the experiments I coded that plotted the MFI(10) divided by price. 

I have long believed that money flow into a security often precedes or 'foretells' a change in price trend direction. Having done more experiments than I care to admit, this premise is, at best, often absolutely true. But the more typical case is that money flow and price direction are aligned at the hip. That is, price and money flow move like mirror images of one another.

In any case, what I'd like to show you today using 6 charts are curious observations - tending to make the argument that miners are about to rebound skyward and the stock market is nearing failure.

The charts we will look at are weekly chart of the S&P 500 ETF (SPY), the Gold ETF (GLD), the Gold Miners ETF (GDX), then conclude with 3 specific miners - El Dorado Gold Corp (EGO), IAMGOLD Corp (IAG) and Royal Gold Inc (RGLD).

Here is the weekly S&P 500 ETF (SPY):

At present the True Strength Index (TSI) indicator is reading just below ZERO at -6.89. That is bearish, generally. But more interesting is the Money Flow Index indicator (divided by price each bar) which has made a series of lower highs as price has made a series of higher highs. It too has a negative reading of approximately -.05. My hunch is that despite price rising, fewer and fewer investors are believing the rally.....yet the big money is quietly sitting still and not selling - until someone yells FIRE! in the crowded room. Then there will be a massive run to get out and it won't be pretty.

Let's next look at the Gold ETF (GLD). 

It appears to be the case that when Money Flow is headed downwards towards ZERO, then submersed for a while, price is somewhere between flat and corrective. That Money Flow has now worked its way back up to ZERO is favorable for a rally, but no guarantee.

So how about we now look at the Gold Miners ETF (GDX).  

Does the chart look about as you expected? It definitely surprised me. Again, as with my earlier post using the OnBalanceVolume (OBV) indicator, something stealth seems to be going on here in a bullish fashion.

Finally, here are the 3 mining stock charts I promised. Any observation I could make is already on the chart for you to consider.

El Dorado Gold Corporation (EGO):

IAMGOLD Corporation (IAG):

And, Royal Gold Inc (RGLD):


  1. John,

    Like the analysis/studies you been putting out. Quick question on this money flow charting. On the potential positive outlook on GLD and miners the TSI is still well below zero. It's true they are weekly charts, but wouldn't you want to see some confirmation on the TSI side also? Thanks.


  2. Hi John,

    Thanks for your analysis. I tried dividing MFI by price and my charts look different. Maybe I am doing something wrong, but in any event, would you share your studies, or are they proprietary?


    Mike M

  3. Hi John! Trond here. Remember the discussion about that silver/gold ratio in the middle of May? You then observed the declining rsi trendline and recommended waiting a little after an upward break until the rsi in addition also exceed 50. On Friday this happened! And before that, yet another lower top touching that declining line. (+ a higher bottom also).

    The Tsi indicator is really forming a falling wedge here, too. (Not above 0 yet, so the rsi is slighly leading).$SILVER:$GOLD&p=D&yr=2&mn=0&dy=0&id=p20716703295

    Do you think this may be significant?

    This resembles somewhat August 2010, when the silver-gold ratio narrowed into a symmetrical triangle - before the rally up from 18$. (In fact, because of seeing that pattern I chanced at buying call options on 40k oz silver, in xag/usd currency cross, strike 22$ and expiration in November. Paying 20k$. At expiration I simply exercised into a long position (at ~27$) w.o having to add any more funds. At the end of April 2011 those 20k$ had increased 50x to 1 mill..).

  4. Rick - TSI confirmation? That sounds reasonable. I guess it all depends on the amount of risk one cares to tolerate. I took my best shots at the moose and have spent 6 months under water. If I had more free money to put into it right now I would buy with every penny. But that's just me. I know I can take the heat because I have before and because I believe what I believe.

    Mike - of course my indicators are proprietary. You sure cannot get them anywhere except from my computer. I use MFI (10) so perhaps that is where your code strayed. Send me an email and I will fix you up.

    Trond - nice catch. Just draw your trend line on either that RSI (14) or TSI (25,13) and you will get your answer. I think if you try your call options trick again right now you will find $1 million bump was pretty small. Go get 'em!