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One of the True Strength Index (TSI) indicator techniques I have found quite reliable for yielding profitable SELL signals is called the negative divergence. It has concerned me lately that the Market Vectors Gold Miner ETF (GDX) appears headed for generating this sell signal and in the past couple of trading sessions I have lightened up on my mining positions considerably with this very thought in mind.
Then I got to wondering, what are the true odds that a TSI negative divergence sell signal on something like GDX would actually foretell a drop in the price of the miners ETF? How often does the signal fail? When it works, how well does it work? And so on.
Before I tell you the two rules I use to define a negative divergence, I should tell you that what follows are 6 calendar year charts of GDX (2007 - 2012) with the TSI indicator. Each chart shows the price and TSI readings that triggered the trade, as well as a possible near-term closure of the trade and the outcome in terms of gain or loss.
And at the end of this article I will recap our findings which, as it turns out, may rather surprise you.
OK - so what is a negative divergence sell signal? I have two rules. First, on an intra-day basis, price makes a higher high and the TSI that day closes lower than the TSI reading of the previous price high. In short, price makes a higher high while comparatively, the TSI makes a lower high.
Second, a TSI trend line break BUY signal trumps the negative divergence SELL signal. In this very unusual situation, the SELL signal from any active negative divergence is closed and it is BUY time. That's it.
I enjoy doing research on stock market related stuff because it helps me be a better trader. This article, and the hundreds of articles I have written before this evening, are first of all for me, and secondly, for anyone who is interested in my research. I spend eons more hours making the charts and crunching the numbers for the readers than for myself. I usually figure out what I want to learn fairly quickly.
Anyway, I had a challenge to figure out how to present this data so that it would effectively communicate the possibilities of the TSI negative divergence SELL signal. To this end I made a couple of rules to guide myself and I would like to share them with you now.
First, the GDX price to the penny that initiates the negative divergence condition is the price I used to begin my imaginary short trade. Second, I closed each trade on the most favorable terms possible within a reasonably short period of time.
Now if your thought is, 'wow - this isn't realistic at all', I quite agree with you. It is not realistic to think a trader could cover the position on exactly the perfect day at the absolute lowest penny of the day. I know that.
Still, I would like to have a feel for how often this trade works, does not work, the general size of the gains and losses possible, and so on. This is research, not reality, but my findings will benefit me and I hope they benefit you as well.
So let's get started with the daily chart of GDX - 2007.
Click on any chart to ENLARGE
2007 had four instances of the negative divergence sell signal. The gray shaded vertical rectangles on the price chart locate the exact bars that apply. The first trade could have been closed about a week later at roughly break even - but I documented the occasion that the trade was closed 3 weeks later for a 2.1% gain or closed 4 weeks later for a 8.4% gain.
The second trade (see second gray vertical rectangle from the left) closed within days for a 6.0% gain or the following week for a 12.1% gain.
The third trade closed 8 or so trading sessions later for a 6.7% gain and the fourth trade could have been closed in 8 days for a 3.4% gain or the following week for a 9.6% gain.
The 2008 GDX had a couple of negative divergence trades that worked out well, then at the end of the year it got rather complicated. Let's take a look at that chart now.
The first trade was worth a maximum of 5.9% and the second could have yielded 13.6% in a matter of days and with a couple weeks of patience reached a sweet 32.4% gain.
Then in the month of December, as the D-wave completed the infamous 2008 bottom and price began it's meteoric ascent, the plane hit a whole lot of volatility. Price was jumping around like a guy who just found out he has flees. Anyway, the first trade was a dud. You would have been lucky to close the trade a couple days later with a 1.6% loss. If you didn't take that out you got one last chance about four weeks later (on the next chart - 2009). This too would have resulted in a 1.6% loss if you were lucky. After that, price has never again been as low as $27.....to this very day.
The other trade was ignited on December 30 or so. On the following chart (2009) we'll see that that one was worth as much as 19.8% in a matter of a couple weeks or less.
2009 produced a lot of negative divergence signals as the miners powered out of their terribly oversold condition. By the way, a negative divergence, at least the way I think about it, is a condition where price simply gets ahead of its own momentum. It is a condition that says that price is out of whack and needs to be corrected in order for the rally to continue.
The February trade could have yielded between 12.4% and 22.0%, depending on your level of patience. The March trade was worth 10.4% in a matter of days, or as much as 19.4% if you held in there for 3 weeks. June yielded a possible 17.0% gain. Interestingly, this is the rally out of the B-wave bottom of our previous ABCD repetitive gold pattern. And July tacked on another 8.2%.
The November time frame was tricky. It included a single trend line break and what appear to be several negative divergences. But on very close examination, using the rules I defined earlier (and always use for myself) there were no negative divergences. If you get out your microscope and think it through bar after bar, I am confident you will come to the same conclusion.
2010 sported 7 more negative divergence setups.....all potentially profitable. 8.6%, 11.0%, 10.6%, 1.8%, 3.8%, 5.1% and 7.8%. The October time frame was a mess. It was one of those 'he said, she said, he said, she said' and so on. Though price managed to inch higher within these pink shaded vertical rectangular days, I have seen this enough to somewhat instinctively know that something is very wrong here - just hang on because their is going to be a shake-out and then it will be time to go.
The 2011 GDX chart above gave us just 4 potential winners. The February/March period was messy - we saw that once earlier - and I shaded it pink to remind myself about these things. There were actually 3 negative divergences nestled in that mess.....if you played the last one you could have taken a ride from 61.25 down to 54.68 (10.7%). I did not put this one on the chart - I just looked at the mess and figured if you traded the first one and got out with lots of luck, you would have made 4.8%.
The 3 following trades were garden variety - potentially worth 11.8%, 4.0% and 3.4%.
Well, here comes the 2012 GDX chart. Of course it's just a tad shorter than 6 months to date, but only 1 single trade that was worth 10.5%.
The other thing to point out on this 2012 chart is our current situation. The previous TSI high was 63.56 and the price of GDX on that occasion, intra-day, reached a high of 48.72. Looks like I made this chart before the close today...which should read TSI 43.18 and high price for today of 47.89. In other words, if price reaches 48.72 ($1.04 higher than today's close) and the TSI on that bar does not close higher than 63.56 that will yield the second negative divergence for 2012.
By the way, the workaround is for GDX to drop just enough to cause the TSI to drop. That would create a new high in which price is not out of whack with the TSI. Then a trend line break could be drawn as price causes the TSI to rise again, and that would be a BUY signal.
OK, let's recap what we found. We had no fewer than 24 trades. 23 of 24 could have been closed for a profit. The definite losing trade was coming out of the 2008 D-wave bottom. The loss could have been significant but there were two opportunities to escape with a loss of 1.6%.
The potential gains for all the winning trades were not ingredients of a get-rich scheme but were healthy enough to consider playing.
If you have any questions about the TSI negative divergence SELL signal technique, or something else stock related, please feel free to write me an email and I'll see what I can figure out - even better I will probably learn something from you!
Keep in touch,
John
tsiTrader@gmail.com
Last weekend I figured out I would be away from my computer every morning this week while the stock market was trading, as I had volunteered to take care of 2 year olds at my church's week long Vacation Bible School. I had sold my NUGT position near the close last Friday and began to think I wasn't too enamored with my position in Thompson Creek Metals Company Inc (TC) - mostly, I guess because I was annoyed with myself for buying it too soon when I really knew better.
So I put in a gtc limit order to sell TC at $3.44 and figured if it sold I would have more marbles to regroup for my next trading episode . Well, today it appears TC hit $3.44 and my order to sell was filled. And you know, a line of rationalization I hear playing in my head is a reminder that a 2.7% gain in 8 days is better money than what any bank would have payed me, so OK, whatever.
But TC did not stop there at my price - $3.44. The darned thing continued higher to reach $3.52 before settling at $3.50.
Then I make the daily chart of TC to show my trade and son of a gun, the chart shows an extremely favorable BUY setup with a trend line break of the True Strength Index (TSI) indicator, as well as a bullish ZERO crossover.
Wow - talk about selling at just the wrong time!
Anyway, other than to write this post with these reflections I will not look back. That's a point of view I chose a couple years ago for these kind of instances. There are more opportunities to make good trades every day than I will ever have the time to take advantage of ...... and the best thing I can do is just move on.
So here is that bullish setup, found at today's close.
My TSI Trading record has been updated.
Now back to something a whole lot more interesting to me - a post that I hope to have completed this evening that examines each and every TSI negative divergence sell signal generated by Market Vectors Gold Miner ETF (GDX) since it's inception in 2007. I've made all the charts so now I need to figure out what they mean and present my findings.
Talk again soon!
I sold my position in Direxion Gold Miners Bull 3X ETF (NUGT) at $12.85 right at the close of last Friday's trading session, booking a 9.8% gain. This brought my cumulative % gain since mid-March up to 95.1% - nearly neutralizing my staggering cumulative 97.7% loss with TVIX, also in mid-March. And my 2012 trading record now includes 18 wins 2 losses and 3 trades still open. That's a batting average around 90% and I really don't expect to be able to do much better anytime soon.
My TSI Trading record has been updated.
Here is a daily chart of NUGT that shows the way it looked when I hit the sell button.
I do not use this FreeStockCharts platform much while trading anymore. I like the way the charts look, but my fascination with home-made indicators keeps me watching the Think or Swim platform much more, as in the following chart.
But the chart that concerned me the most was this next one. It is /GC , the Gold Continuous Contract, with the fascinating volume indicator I created a few days ago (New Study14). History showed me that the daily buying pressure for the Gold Futures contract was not without limit before price had to snap and at least take a short breather, if not downright collapse. With a reading in excess of 99.5 out of 100 I figured it was time to sell NUGT as I had a nice gain and take a step back - wait for a more favorable setup. So, that's what I did.
Anyway, gold has been trading this Sunday evening a little over one hour. The range began at $1631 dropped to $1607, predictably rebounded to the Fibonacci 50% retracement level near $1619 and predictably has now fallen to the 38% retracement level for the obligatory retest (which appears to be failing).
I swear, if I have seen this trading pattern of gold's once, I have see it a thousand time. That will make a great research project to write about.... but another day. Dinner is ready!
Have a great week,
John
tsiTrader@gmail.com
As I have written about the HUI Mining Index recently and been watching the related GDX (Market Vectors Gold Miners ETF) with some intensity, I thought some readers may be interested in an update on the True Strength Index (TSI) indicator status of the current rally. And I hope to share a TSI trick or two along with a revealing characteristic of GDX's price performance.
So first let's get to a chart that frames the bigger picture for GDX. The ETF was land-locked within a huge 18 month megaphone pattern until 10 weeks ago when the ETF fell right through the lower boundary of the megaphone pattern. The fall ultimately took GDX from $48 to $39 which amounted to a stinging 18.75% correction.
The good news, however, is that GDX is now back up to that lower boundary of the megaphone pattern, as we can see in the following chart.
Today should mark the 10th day the ETF has closed above its 50 dma. That's bullish.
And last week GDX made it first attempt to close above that megaphone pattern line of resistance, but failed. Not too surprising. Anyway, it looks like GDX is thinking hard about making its second attempt any day now.....but there is a problem.
This next daily chart of GDX makes plain both the problem and the solution - at least from my TSI point of view. Unfortunately, the chart looks busier than I would like and reminds me that making great charts is not usually as easy as it may appear.
Anyway, take a closer look at this.
There are two different ideas on this chart, so let me finish explaining the first idea, then we'll get to the other idea.
On the right side of the chart I note that if price continues up each day until it, on an intra-day basis surpasses the previous high of $48.72, it is highly unlikely that the TSI indicator would simultaneously surpass the reading of the previous high ie. getting from current TSI 0.16 to above previous 0.64
If price should follow the recipe just described, it would yield a negative divergence SELL signal and I would absolutely positively SELL my NUGT position in a heart beat.
The workaround, however, is for GDX to close low enough sometime soon to cause the TSI indicator to fall. That would create a point from which to draw a trend line break BUY signal from the TSI high of 0.64 once price resumed the rally. That would be very bullish!
The TSI trick I wanted to show you (also chart above) is the Inverse Positive Divergence BUY signal that occurred a couple of days ago. The gold colored lines and explanation I hope say it all, but if you would like more information on how this works, just write me, OK?
Finally, GDX - "The Chameleon".
By my count and the drawings on the chart, GDX has 'redefined' the trend line of this rally 6 times. So far anyway, every time price has stepped out of bounds, undoubtedly fooling lots of good folks to give up their shares, GDX has been brought to life with a fresh round of buying.
The three indicator panels below price are my standard TSI (7,4), a fast stochastic of the Demand Index that I created a week or so ago, and a New Study I have not yet named. It seems to work well - notice the green color at resting points which often are significant tops or bottoms. I was annoyed that my ThinkorSwim platform only makes data on bid/ask for the forex market, not the stock or futures markets. So I had to think of a workaround for assessing volume change in minute detail and it appears I may have been successful.
It is a nice relief to see gold doing so well of late. I just took a peek at /GC (Gold Futures) daily chart and my New Study is reading sky high - 98.735 out of an impossible 100.00. Looking back at a few years data I notice that this indicator gets up to this level and even high on a parabolic move and really does not tell you the party is over until the first day it breaks. The 4 hour and 1 hour look at /GC with the indicator suggest we are not imminently overbought there could be some more legs today to get back above $1620, for a short while, that is.
Best,
John
tsiTrader@gmail.com
Everyone likes to buy something, stocks or otherwise, at a price they consider a great value. And I have been researching Thompson Creek Metals Co Inc (TC) for a couple weeks now, thinking its shares may be available at a price that I would consider them a great value. Today that opportunity presented itself and though I was a little too excited to wait another hour for the best possible price, hey, I'm human and now I own the shares at $3.35.
My TSI Trading record has been updated.
Since the time of my purchase TC shares have fallen another dime to $3.25. But here is how it looked at the time of my purchase.
On the chart I have written a some of the fundamental data that I considered. Primarily, as I mentioned above, I see this as a value stock that has been incredibly beat up, investor sentiment is bleak, shorts are dramatically increasing their positions, and I would think at some point fairly soon the pendulum will swing in my favor.
However, if the stock market has a couple of more sharply down days following today's bearish reversal, I concede that TC may well have not hit the pavement....yet.
Patience, as always.
And this daily chart of TC from www.StockCharts.com with the buying pressure indicator Chaikin Oscillator and the Money Flow Index indicator.
Anyway, if you would like to do some due diligence on Thompson Creek Metals, here are some links to get you started on that journey. These links are not entirely favorable to TC, lest you think I am not interested in being objective. :)
www.Fool.com
www.Fool.com
www.SeekingAlpha.com
www.CNBC.com
www.Forbes.com
www.Nasdaq.com
Well, I'm showing TC at $3.22 now with 10 minutes to the close. It's a route and I got on the wrong side of the parade. But I hope a reader takes advantage of this information and does even better than I do!
Best,
John
tsiTrader@gmail.com
Lately I have been wondering how the HUI Amex Gold Bugs Index has performed at critical turns in gold's repetitive secular bull market ABCD pattern - and particularly how it has behaved at the bottoming of the B and D phases of the pattern. This curiosity would seem to apply to our current trading as I believe gold is in the process of concluding the B-wave phase and just beginning to embark on the C-wave phase.
If you are interested in seeing the details of how the HUI behaved during each of gold's B-wave and D-wave bottoms from 2002 - 2012, read on as I have prepared charts for each instance that include price trend line breaks, fibonacci retracement measurements, day counts for the initial rallies, True Strength Index (TSI) indicator buy/sell signals given using the trend line break teachnique, and all referenced to the underlying price of gold.
I will recap some of my observations at the conclusion of the charts presentation.
Let's begin with a broad view of the HUI Gold Miner's Index price performance over the past 10 years. This first chart is a weekly beginning around June 2002.
Click on any chart to ENLARGE
This chart begins with gold's second ABCD pattern. The green arrows locate the BUY signal given by the trend line break technique of the TSI at each of the B-wave bottoms. Below the TSI indicator panel is a simple indicator I created to show the closing price of gold (/GC) along with its high and low price each day. This will be easier to observe in the following charts.
Finally, the Fibonacci retracement calculation reveals that the HUI bottom reached 4 weeks ago was nearly a perfect 50% retracement of the past 10 years upward price movement and that price last week bottomed on the 38.2% retracement and ended up closing $12-13 higher than that level for the week.
Here are the daily charts of the HUI - Gold Miner's Index beginning with 2002 and 2003.
The green vertical lines spot the TSI BUY signals, the dark gray lines point to the SELL signals. Sometimes I point out the Negative/Positive Divergence BUY/SELL signals, but not always.
The lowest indicator panel shows the closing price of gold (dark blue) as well as the high and low price (red and light blue). Also seen in this panel is the location of gold's B-wave or D-wave bottom.
The red diagonal lines offer a price trend line and a count of the significant high and low trading days is given in blue.
Also provided are some Fibonacci measurements nested within larger rallies.
Next up are the B-wave and D-wave bottoms of 2004 and 2005.
And the D-wave/B-wave bottoms of 2006.
The infamous 2008 D-wave bottom followed by the B-wave bottom of April 2009.
And finally, our 2012 D-wave and current B-wave bottoms.
On the final chart I made some notes to myself in the upper left hand corner regarding my immediate expectations for the HUI/GDX trade. Basically, price and the TSI indicator have got themselves into an interesting situation. That is, if price rockets higher for the next couple of days it will create a negative divergence SELL signal. However, if price falls sharply and the TSI does not make a lower low (0.187) then that will yield a positive divergence BUY signal.
At present I am long NUGT - Direxion Gold Miners Bull 3X ETF - and I would welcome a couple of strong up days then unload. You may have noticed in the preceding charts that once a steep price up trend is broken (as seems to be the case in our current chart) it is usually only a matter of a day or two before price goes into correction mode (2003, 2004). And heck, maybe price continues higher and Friday's low becomes the new trend line. Who knows?
A couple of interesting things you may not have noticed. By the very rules of how gold's repetitive ABCD pattern are defined, the D-wave bottom is always lower than the following B-wave bottom. But the HUI is not obligated to follow these rules and in fact, we see examples of D-wave bottoms that are followed by an even lower B-wave bottom (notably May 2005 and May 2012).
And yes, the C-wave rally that followed the May 2005 B-wave bottom was a screamer. HUI went from $166 to $402 (142%) in just under 12 months. I have every reason to believe that something similar (probably much better) is in the cards for those who are patient investors of miners.
I hope the hours and hours I have spent making these charts will reward you will fresh insight and inspiration.
Have a great week,
John
tsiTrader@gmail.com
Ps. How do you like the accuracy of those TSI trend line break BUY/SELL signals (light green/light gray arrowed vertical lines)?
I had some time this morning to watch things carefully (sure is nice to be on summer vacation) and was looking for an opportunity to get back on the bull for another ride. I managed to resaddle my long position in Direxion's Gold Miners Bull 3X ETF (NUGT) at $11.70 - just 5 cents above what is the low for today (so far, that is).
My TSI Trading record has been updated.
Click on any chart to ENLARGE
The next couple of charts will show you what I was working with in anticipation of buying NUGT this morning. First, there was a price trend line dating back to the May 16 low. I suspected that this trend line may be reached but if violated, not for very long. I placed my initial buy order right at the trend line - $11.50.
But as price neared my target price I began to recognize a problem. The True Strength Index (TSI) indicator was running out of room for price to continue much lower. That is, it was nearly signalling a trend line break BUY, yet price had not reached my target.
At the same time, the Demand Index Triple Stochastic indicator I recently invented had flattened out, was way oversold and then beginning to turn up. Decisions, decisions.... Do I hold out for a BUY at the price trend line ($11.50) and likely get nothing or do I just take a guess and get in?
Simultaneous to this gold (/GC) looked to be completing its melt down and testing the 61.8% retracement I wrote about two posts ago. Anyway, I just changed my limit order from $11.50 to $11.70 and that worked. Here is a look at gold (/GC) and that 61.8% retracement:
Gold reached $1579.4 then bounced. At the moment it is having difficulty getting back up through the 50% retracement level ($1594) so another retest of the $1575 area would not surprise me. It would also not surprise me if NUGT now trades down to the price trend line (now nearer $11.70) and penetrates it slightly. This will trigger some stops I imagine and the smart guys will probably load up and take all they can get.
Finally, I would like to remind readers that this is a bull market for gold and the miners. If/when I have a position in a good miner or ETF that is trading at a loss, I just sit. I do not get emotional and worry about how much money 'I have lost'. The truth is, of course, that one does not lose any money until one sells.
The bull will correct my timing mistake - my buying 'too high' - if only I am patient.
OK - I admit it. I do feel the emotion of being 'pissed' when my position(s) is/are under water. That's because I like to trade and don't like to sit. But as long as my trade is long the bull (and not short the bull) I just deal with it and wait and wait and wait and wait.
Best to you and wishing your trading success,
John
tsiTrader@gmail.com
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