Wednesday, June 19, 2013

So Where Exactly Is the Smart Money Going?

As today was one of the more interesting days in the stock market than most I have seen in the past few weeks, with lots of excitement (panic) everywhere one looked, how about we take a peek at where the smart money has been hiding?

Money, it seems, is always on the move. So while some ticker symbols are rising, sometimes big money is actually being transferred out of that security. Seems like it should not work that way but it does. And big money, believe it or not, sometimes pours into a particular security or sector for quite a period of time, yet price stagnates - even trends lower. And that sounds counter-intuitive as well.

Well, today I am going to share with you some thoughts on how this actually happens and show you some interesting examples - snapshots taken of this and that just before today's close - with an eye on taking a peek behind the curtain.

This post will look at 7 charts. Stuff like the S&P 500, gold, gold miners, crude oil, and a couple of individually outstanding specimens from the mining group - Banro (BAA), Gold Fields Ltd Adr (GFI) and Silver Wheaton (SLW).

Besides using my trusty True Strength Index (TSI) indicator for assessing the price momentum in each chart, I'll include another indicator known as OnBalanceVolume (OBV) to show us what really is going on behind that curtain.

So let's get started with a look at the weekly S&P 500 ETF (SPY) at the distance of 5 years and closer up.

Click on any chart to ENLARGE
The way the OnBalanceVolume (OBV) indicator works is very simple. Each day a stock closes either up or down, for a gain over the previous day or for a loss. The indicator simply adds the day's volume to the previous day's indicator reading if an up day, and subtracts the day's volume if a down day. In case the day closed unchanged from the previous day, the indicator does not count that day's volume either way. 

What tends to happen, as one would suspect, is that the OBV indicator closely mimics the movement of price. But not always, as we will get to later.

The weekly S&P 500 chart's TSI (7,4) was rising at the beginning of today's trade. As I could see that price was only $35ish from testing the all-time high I found this very amusing. Part of me was hoping that Bernanke's talk today would cause price to rally to a new high because the positive divergence SELL signal would have been obvious from across the room. That didn't happen, unfortunately, but put me down as thoroughly bearish, just the same.

But take a good look at the OBV indicator. Doesn't it appear to be rolling over? And if so, what usually happens next?

Now let's take a look at Crude Oil (/CL) on the weekly. Whereas the S&P 500 OBV indicator is hinting strongly at heading south, and the longer term view of the chart on the left reveals how little new money has been put into the stock market since 2011 (despite amassing a  huge gain since then), Crude Oil tells a different story altogether.

If you looked only at the OBV readings of the past 9 months you would guess that price has been skyrocketing. But it hasn't. Instead, Crude Oil has been wiggling around for months forming a pennant pattern that has been preparing for the rocket launch. The OBV indicator reveals that behind the curtain, big money is piling into oil.

Anyway, how about we look at gold (GLD) and gold miners (GDX) next. But let's begin not with today's chart, but with an observation of the 2008 bottom. 

We like to take comfort in knowing that human nature repeats frequently, and naturally that inclines analysts to look for patterns that, when they repeat, give them a measure of comfort in asserting their ability to 'see into the future'. (That includes me :-)

But what I am going to show you about gold and miners is that perhaps this time around they have reversed their pattern. Technically speaking, in 2008 gold reached its intraday low two days before the miners. And as you will notice in our next chart, the OBV indicator bottomed well before gold's price. And, the OBV indicator for GDX bottomed long after the miners price.

So perhaps it may be fair to suggest that in 2008, big money was buying in anticipation of gold's bottom, but not really fully loaded when the miners bottomed.

Now let's take a look at today's weekly charts beginning with with GLD.

Humm...... looks to me that the big money is leaning toward a bullish resolution as the OBV indicator does not read as on the pavement, but even these guys are still pushing each other around and stuck in a shouting match within a range.

So how about a fresh look at today's GDX? Still the laggard as in 2008? 

Now this is kinda interesting. I hope I am not seeing things, but I could swear it appears that since day 1 following the April crash the big money has been buying, buying and buying.

I wonder if there are other clues this may be true.

Let's put a chart of Direxion's 3X Gold Bull ETF (NUGT) on the screen and see what gives. And while we're at it, how about we throw in a little Silver Wheaton (SLW) to represent the silver miner interests.

Wow, look at that. The big money HAS BEEN LOADING UP FOR TWO MONTHS NOW.

And check out that textbook perfect inverse head & shoulders pattern on SLW. Ain't that pretty? From the candle spotting the $21.45 low just look 21 days to the left and 21 days to the right. Mmm... does not get any better than that.

While I'm at it, I might as well show you a couple more. If both of these go up faster than the others you can say you heard it here first!

Oh yeah, I almost forgot to tell you how it is that these divergences in the OBV with respect to price show up.

I did not read this in a book somewhere so if you know the answer differently, do tell! But looking at the way the indicator works the only conceivable explanation is that because the indicator only rises when price rises and only falls when price falls......the answer has to do with volume on up and down days.

So...... as the indicator has been rising sharply for NUGT, GDX, SLW, BAA and GFI - all the while their share prices have remained in the gutter - it means that while these big money players are trying to load up and accumulate these shares, sometimes one or more of them get, shall we say, 'a little carried away'. Like a kid in the candy store who sees everything on sale, he buys 5 when he should have bought 2......then oops, the price turns green at the very end of the day and OBV, of course, rises.

Enjoy these last two trading sesssions this week. I think they are going to be great!

Take care,



  1. I did some Accumulation-Distribution work in the first part of this year that might interest you and your readers.


    The Gold chart's annotation has been updated to read:

    "After the inverse head and shoulders, longer term accumulation had been non-existent in GOLD, and distribution notably present, until the 3 month period just before the recent breakdown, and gold is now seeing distribution on the rallies once again."

    (Not able to post the chart using Blogger comments.)

    Nice post. Thanks.

  2. Your charts are nice, but price keeps moving in the opposite direction. I think all of us have to remember that we can't look for what WE want to see, but try to look for what is most likely to be. Same goes for me!

  3. Intriguing as usual. Thanks.

    In line with your thinking is what happened to GLD & GDX IN 2008. They dropped along with SPY, especially GDX. While they continued to drop the OBV began to rise. Then while SPY continued to drop, GLD & GDX went up and up and up. Quite tempting.


  4. Hi John, Another excellent article. Thanks for the insight into OBV. One question. Why on the current GLD where you have the 5 yr W and 3 yr W charts side by side does the OBV_JT(1,1) indicator show different values (1.1376 for the 5yr, 0.9246 for the 3yr)? Note that the TSI shows the same value, -38.022, for both charts. Thanks again. Bruce

  5. High Rev: and thank you!

    Anon: I actually do have a line in the sand regarding gold and miners, but I don't talk about it. Yes, I would like to see what I would like to see, and no doubt about it I put the best spin on what I have to work with, but there is a point when I will become convinced I have been entirely wrong this whole time.

    Doug: hey, it's your money....take good care of it!

    Bruce: good question and I apologize for not anticipating in my article that a sharp fellow as yourself would wonder how this could be explained.

    OK. The answer entirely has to do with how many bars one uses in the look back period. For example, if the chart is set to only show 1 year of data, the OBV indicator essentially starts with that first day a year ago and begins adding each day's activity (per its simple formula) to the balance of the previous day.

    I guarantee that having one chart using OBV set to 1 year and another chart set to 5 years will not give the same answer. It will be useful information, but it is information that is skewed a tad by the look back period.

    Pretend: (1+2-4-1-2+7) = +3
    and: 3+1+2-4+(1+2-4-1-2+7) = +4

    Both summation exercises use the same numbers in the parenthesis
    both the second uses a longer period of time and therefore more numbers.

    Ha ha - you learn something everyday!

  6. Dear John,
    I would be grateful if you could spare some time and look at gdxj as regards OBV and advise your findings.
    thanks. your ending comment "Enjoy these last two trading sesssions this week. I think they are going to be great!", gold, silver, miners are all being hammered!!.
    good day and pleasant weekend

  7. Hi John, thanks for the excellent work you took the time to share for us. I commented a few months ago that I had a target for $1280, the .382 retracement of the entire move up. Well, that target was finally hit today. I expect a bounce to 1320, then onto 1530, a couple .382 retracement bounce targets.

    Imagine the COT report after today's action! I won't be betting against the commercials and plan to start accumulating tomorrow after being out since last October. I'll be looking at the deals in the miners of course.

    Thanks again!

  8. Anon#1 - GDXJ.... I wish there was a way I could put a gracious spin on the OBV reading for GDXJ at the moment. Like most miners, it looks terrible. But what intrigues me more, at the moment, is what appears to be a triple top on DUST. I've been doing some reading on this and save for the blast to new highs today, it fits the pattern to a T. DUST closed today at $126.95 and should it continue the reversal it began in the last couple of hours today and ultimately continue to trade lower, price projects downward to around $25. That would be an incredible fall and no doubt GDXJ would go to the moon.

    Anon#2 - COT etc., yes, you were and are correct about the 38.2% correction....and I most definitely was not. Something that intrigues me now is the weekly HUI chart NOT on log scaling. The HUI closed today right at the trend line from 2001 to 2008 to 2013. I'm guessing if miners begin to bounce off that level me may have a party to prepare.