TA Pro's vs. Magic Bullet Joe's...
This has been a tough market. Just a few weeks ago, both
gold and the HUI gold bugs index hit new all time highs.
Cause for celebration?
You betcha.
And why not? Oil was at new highs, natural gas was smokin’
hot, the agricultural commodities were flying, and rising
commodity prices were in the headlines on a daily basis.
And to top it all off, the U.S. Dollar had collapsed to
new lows.
The charts were all looking good. Gold was clearly in a solid
uptrend. The fundamentals couldn’t have been better, and gold
bugs couldn’t have been happier – all was good.
Sounds a little bit like March, 2006 Déjà vu doesn’t it?
Remember this?
That, soon turned into this...
No early warning from any technical indicators. No TA system
called that top. Not Elliot Wave, not Candlesticks, not
Fibonnachi, not Point & Figure... no TA system worked.
Not a one.
And it was no different at Gold's recent $1000 top in March.
Tell me... what was wrong with this chart?
Not a thing. Could a trendline possibly be more beautiful
than that?
Technically overbought you say?
Well, if you think Gold was overbought at $1000, you would
never have been around to have seen $1000, because Gold was
more overbought at $745, $848, and $916. Look at all
those red circles on all those indicators - where Gold was
more technically overbought at much lower levels than it
was at $1000.
And this is my main bitch about Technical Analysis.
TA, real TA... the kind that actually works, is not about
"systems."
Repeat that one more time.
"Real TA, the kind that works, the kind that both makes you
money, and saves you money - is not about systems."
It's about basic blocking and tackling, and using basic
tools: Trendlines, price, volume, and valuation ratios.
Now I know "magic bullets" are sexy, and plain & simple
tools aren't.
But, this isn't about sexy, it's about making money. And
the key to making money is not in a system, but in using
the right tools. And to use the right tools, you'd better
be following the right fundamentals.
TA in a vacumn never works.
TA is a filter for correctly reading the fundamentals.
The two go hand in hand.
So how do you know what fundamentals to watch? Which ones
to give the most weighting to, and which ones to give the
least weighting to?
Should you be following individual technical indicators like
RSI, MACD, or Stochastics just relative Gold? Should you be
watching the Dollar, or the Euro? Or, watching valuation
ratio's like the DOW:GOLD ratio? OIL:GOLD? Or, GOLD:CRB?
The answer is actually pretty simple.
It depends on what gold is most closely correlated to
at the time.
How is gold trading?
As a commodity? In line with Oil, the CRB, or the DOW?
Is a rising market tide merely lifting all boats? Is gold
leading, or following? Is it negatively correlated to the
Dollar, or the Euro? Or, positively correlated to the Yen?
As an example, leading up to this correction, gold had:
- a correlation of 0.29 to the GSCI commodity index.
- a correlation of 0.45 to crude oil.
- a correlation of 0.62 to the Euro.
So, how was gold trading?
Obviously, as a currency.
But, which currency?
Let's narrow the filter down a bit...
Everyone wants to talk about the Euro, and the U.S.
Dollar. But, what's really the most important
currency when it comes to gold?
What drove the May 2006 correction, and the August
2007 correction?
The Yen.
And why?
Because of the near $1 Trillion Dollar Carry Trade,
with much of it in commodities, and gold.
For over two years now - the Yen has led.
Until it's broke - don't try fixing it.
Continue to always monitor the 4 major currencies
that give the clearest read on Gold:
- Japanese Yen
- The Euro Dollar
- The Swiss Franc
- The U.S Dollar
But, keep your eye most closely on Gold:Yen.
Back to the $1000 Gold top and this most recent
correction...
So, how accurate in signaling a top, and an exit
are these "tools" assuming that you're using the
right tool?
Well, it's time to cut to the chase and take a look...
How accurate was this?
The day gold broke it's positive trendline vs. the Yen,
virtually marked the top in gold.
The Yen led, the Swissie followed, then the Euro,
and actually, Gold is still holding it's positive
trendline vs. the US Dollar.
And what does that tell you?
It tells you that the longterm trend is still
intact...but, if Gold breaks it's trendline vs. the
Dollar... Katie bar the door.
All eyes should be on the Gold:Yen trendline here.
I think I've pounded the table on that for a while
here.
Once again, if it's not broke - don't go trying to fix it.
E-waves didn't call the top. Neither did Candle Sticks,
Point & Figure, or any other magic bullet "system."
And they never do.
They key was to be using the right TA tools, as filters
on the right fundamentals.
Simple tools.
No magic bullets, or systems.
...just use plain & simple trendlines,
and keep your eye on Gold:Yen.
Mo later,
S.O.T.B.
PS: This bull still has some buck left in
him... no pun intended. But, given that gold has
broken it's positive trendline against 3 of our
4 currency horsemen... the environment remains one
of: low/moderate reward and high risk.
Think of a flashing yellow cautionary light.
Focus on winning the wars.
This is just an interim battle for ground that
hopefully has already been banked.
So manage your chips accordingly. |
