Gold set for move higher 8-27-08

In the last update on Friday I put up a chart of gold which had a potential inverted head and shoulders formation developing. Almost exactly like I had predicted we are in the midst of completing a right shoulder right now. We retested the lows that were reached during the formation of the left shoulder (805 area). I had mentioned that if a bounce were to occur from there I would be buying gold stocks. Yesterday we hit those lows in overnight trading and then we saw a huge $20+ rally off the lows. The neckline is right around the $840 level, I anticipate us breaking through very shortly and a rally to the $900 level should occur.

In the last update I also mentioned that oil was putting a bottom in and natural gas as well. Since the last post was written there has been a lot of movement in the energy markets. There has also been a lot of talk about hurricane Gustov and the potential that it could turn into a category 4 storm by the time it reaches land in the gulf of Mexico. This threat will certainly escalate the energy prices since a great deal of oil and gas rigs are pumping in the gulf. As I write this morning we are up about $2 in oil and 40 cents in Natural Gas. I can see the rising energy prices putting a damper on the main markets as they have done in the past ,and send the Dow and S&P down the toilet.

Gold, dollar, Oil, Dow Update 8-22-08

A lot occurred this week that gave us a clearer indication of what to expect going into next week. Gold seems to have bottomed out, the dollar halted its monumental rise, and the oil market showed strength and the main markets began to break down again due to weakness in financials.

We are currently trading about $45 higher in the gold market than a week ago. We haven’t made any lower lows, and we saw some very impressive gains on high volume this week. When looking at the dollar index, which doesn’t have any more legs, there is good evidence to suggest the $775 level was as low as we will go. The chart below doesn’t justify the inverse head and shoulders that had formed on the 1 hour chart. You can tell however that the pattern seems to be forming with the right shoulder still needing to be completed. The formation should have us test the 800 level early next week, then a surge towards the end of the week. We will see how this develops. I’m holding positions in AUY and HL. On a dip to 800 I’ll be adding others as well.

The dollar like I mentioned earlier has run out of steam. We broke a long-term downtrend line but have crept back under it. We went from being extremely overbought to extremely oversold is a short period of time. I’m very uncertain about the direction of the dollar. Many are suggesting that weakness in Europe and the UK will cause them to begin cutting rates, but we already knew that was a possibility and is probably factored into price already. Many have theorized the gold market will decouple from the dollar as European investors pour into gold for a safe haven from their weakening currencies. I think this is a definite possibility however I don’t think it is likely in the near term.

The main markets have staged an impressive rally today, however I doubt it will lead to any sustained further gains. There is a solid band of resistance in Dow 11700-11800 which causes any gains near this area to fizzle out. I’m doubtful we will reach this area again anyways. Looking at the bigger picture we are completing a right shoulder of a large head and shoulders that has been developing since February. We are starting to roll off. I think new lows in the Dow are very likely in the next month or so, thanks again due to weakness in financial stocks. I’m holding a strong position in SKF; I’m confident next week we will see it perform well.

$140 oil is not a thing of the past. In June-July the market was simply overextended. The long-term trendline all the way from January 07 lows has not been breached. We also stabilized right above the 200-day average and saw some strength this week. I think it is safe to be long in oil from this point. This market trades similar to natural gas as well, so I’m bullish on both from here. I’m adding positions in Chesapeake Energy CHK, and NGAS.

Gold Market Update 8-21-08

We are looking very nice in early morning trading. The main markets are set for some more losses as the GSE’s continue to break down further. The dollar’s rally seems to have run out of steam. The metals markets and energies are running wild. I am still long in the gold miners, and short the financials (skf).

Gold has now traded 3 days without putting in a lower low. Stochastic indicators have turned over 20 so we now have good momentum towards the upside, at least in the short-term. When this occurs markets have a tendency to run for the 18-day moving average and then catch their breath. In the gold market there is strong resistance around $860 which is also about where the 18-day average is. We should be able to run there within the next few days.

Natural Gas Update 8-20-08

Of all the commodities that have recently receded, none has been as badly damaged as the natural gas. Unfortunately with markets, a downward trend is usually much faster than an up trend. This is very evident with the natural gas. We gave back almost all the gains that were built in the previous 7 months. However for those looking to get long in the natural gas, I think the opportunity is starting to present itself.

Although I advise against bottom picking, there is good evidence to suggest we are there with the natural gas. Upon examining the 1-year chart, we have retraced almost all the gains we made since January and the downward trend is starting to slow. Most importantly there is positive divergence on the Chaikin Oscillator suggesting that momentum will be turning upwards on the accumulation/distribution line.

I love this indicator because the psycology behind it makes great sense. Accumulation/distribution suggests that depending on where price closes in relation to the daily highs and lows, we can determine whether there is increasing or decreasing pressure in the established trend. In the case of natural gas, the initial drop saw daily price closes at or near the daily lows. In more recent trading the price closes are further off the lows signaling that even on down days there is buying pressure. This suggests that the downward trend is waning and a turnaround should occur shortly.

My favorites in this sector are NGAS Resources (NGAS) as a high growth junior and Chesapeake Energy (CHK). I’ll be looking for entry points very shortly.

Financials tank markets, history repeats itself

The pundits on financial TV constantly try to call bottoms. They emphasize good news while downplaying or twisting the bad. One thing cannot be disguised however, the continued problems in the financial sector. The banks balance sheets will continue to be deteriorated as long as housing prices keep falling. And they must keep falling despite any government intervention to prop up real estate prices. Why? Credit has dries up and people are beyond their natural ability to service any more debt. The path of least resistance is down, both for real estate prices and the financials.

This morning SKF broke through some resistance we had at $130, I will be watching whether we close above this mark. If we do then we should continue on upward with very little resistance. I usually watch Citibank and Bank of America when holding skf. Both charts look extremely bearish as does the DJIA and the S&P.

What gives me much confidence in SKF is the Philidelphia Bank Index chart. We are now trading below the 50-day moving average after falling off a double-top at $72.50 that also coincides with resistance that was previously support at the Bear Stearns lows in March. Since we couldn’t trade beyond this level it is a good indication that despite some short squeeze rallies, we should be going down in the bank index which will send SKF further upwards in the short to midterm.

Get into Gold Now!! 8-18-08

Now, I haven’t been trading gold for too long, but I know a few things about trading the precious metal. In this market, sentiment is a MAJOR market mover!! How does one measure sentiment? Well the best way I know is to compare the ratio of mining shares to the actual price of bullion. Here is what I mean.

Gold has become an incredibly undesired commodity mainly because investors have forgotten why it has any importance whatsoever. People are fearfull of this market because it is associated with incredible volatility and long periods of sideways movement. So when things look bad, people panic, and panic selling is the best time for calm contrarian investors to come in and scoop up cheap assets. Then as gold markets climb higher, overly bullish sentiment creeps in, so it would be time to sell. Don’t buy when things look rosy!! Lets just look at some of the top gold producers and their lows last week compared to a year ago (August 16th 07).

Goldcorp- Last week-$ 29.09 Last year- $21.00

Newmont- Last week-$40.78 Last year- $38.01

Yamana- Last week- $9.26 Last year- $8.40

Agnico Eagle- Last week- $44.01 Last year- $34.24

Meanwhile during this same period gold bullion has risen from about $650 to 1030, and currently sits at about $800. These mining companies have been reporting record earnings, they have realized a gold price around $900 the last few quarters and yet they are barely trading higher than a year ago! No wonder investing in gold is out of style!

We are still living in a highly inflationary environment. Real interest rates are negative, not just in America but in many places worldwide. It will not take investors long to realize that the fiat currencies of the world cannot replicate the value of gold as money. Investors worldwide will once again turn to the precious metal as a safe haven. The gold bull market is still well underway and when the price of bullion picks up steam these miners will return to all time highs. Now is one of those incredible opportunities to get in on the bull market.

The chart below illustrates something that I have show before. The ratio of the price of mining stocks (^hui) compared to the price of gold bullion. This measurement shows that the ratio is at a historic low and is deeply, I mean INCREDIBLY oversold. Look at the RSI indicator. What occurs anytime we touch 30? This signals the lows before the next seasonal rally which is due anytime between now and September.

No Fail Technical Indicator

If only every small investor new about the technical indicator I’m about to point out, the smart money would have a much harder time beating the public. In addition, financial services would be a much smaller industry because investors would avoid fees from “professional” money managers who give them pathetic 5% yearly returns. Most people could do just fine with a few simple strategies. So with all the “gurus” on financial TV trying to tell you that the bottom is in, or that it’s time to move back into financial stocks, here is a tool you can use to determine the true beginnings of the next bull market.

The indicator I’m talking about is the moving average crossover. It is the simplest indicator you could ever use, yet many experienced investors do not look at it. All you do is take a long term chart (3-years or more) and plot the 20 and 50-week simple moving averages. When the 20-week average crosses the 50-week average to the upside by more than 3%, this is a buy signal because we are entering a bull market. When the 20-week average crosses the 50-week to the downside by more that 3%, this is time to sell because we are entering a bear market.

This strategy should be used only on indexes or other large asset classes. It is not reliable when analyzing individual equities because they tend to be more volatile and can change trend in an instant. If you are a very inexperienced investor, and looking to invest long-term in indexed funds, this will help you avoid losses in a bear market.

Some examples of this are on the charts below. DOW Index-Bear Market, S&P 500- Bear Market, US Dollar- Bear Market, Gold- Bull Market, Oil-Bull Market.

Friday in a Bear Market 8-15-08

Judging from the last few posts I’ve made, seems I’m getting a little lost in this market. I had an abbreviated week due to a long weekend getaway. But now I’ve stepped back and did some homework hoping to start fresh next week.

The metals and energies are not recovering like I suspected. I made a few small entries in these markets and will be holding my positions. Even if they are underwater in the short term, I don’t see us going much lower. This is difficult for many investors especially given the volatility. I’ve been in this situation many times and it is best to just ignore your short term paper losses and be confident that a reversal is coming. I rarely use this strategy in most markets, mainly just in metals since the reversals can be so unpredictable.

I’ve been looking at the main indicies and am now under the impression that we are going to trend higher at least in the very short term. Today we should climb higher even though history will tell you Fridays in a bear market are rarely up days. This does not mean I’m getting long any of the indexes. The russell 2000 and QQQQ are looking the best. Both closed above their 200 day moving average and plowed through the 50 and 100 day averages as well(see charts below). Still each rally should be looked at with skepticism. Anyone who goes long these markets is seeing huge volatitity and steep breaks. It is very difficult to judge when the uptrend is over, but I’m waiting until they look to be topping out and will get short since this is still the bigger overall trend.

The DOW and S&P have not shown as good strength as the Q’s and Russell 2000. If they follow suit then we are still a ways away from the top. Lately the DOW has been the leader of the other averages. A break down in financials will drag this market down and probably the others as well. Looking at the DOW chart the current pattern looks more like a bearish flag than a sustainable rally (see last chart).

Gold and Natural Gas, Thursday 8-14-08

CPI numbers just came out at 8:30 and they were worse than expected (Full Article). Inflation is out of control and the FED can do very little to stop it. When golds seasonal rally takes off, expect it to be more powerful than the last. But I don’t think we are there yet.

As I mentioned in a few posts yesterday, I’m watching for the bull trap in gold. It was nice to see the yellow metal up slightly when I woke up this morning, but we are down slightly since then. I’m expecting we re-test the 800 area before we make the seasonal rally. Of course I can never be sure, so I’m accumulating a little at a time. When stochastics come out of embedded status I expect we make a big run. Now we are still under 20 (see chart).

Another market that has grabbed my attention is Natural Gas. This market had an unbelievable run earlier this year but has been battered badly in recent months. Natural gas when compared to crude oil is incredibly undervalued if you compare the energy that it can produce. It has also traded at a very low historical ratio as compared to crude. It looks as though this market is bottoming out, so I’m looking to get long here as well. You don’t actually think energy prices are going down, do ya??

Bull Trap? Or beginning of Golds Rally?

The problem with trading gold is that even if all indicators are bullish, you can still get caught on the wrong side of the trade. I’m very optimistic right now. We saw excellent volume in the miners, and strong gains strait to the close. The HUI gold bugs index finished nearly at the days highs thanks too strong performance from AEM, KGC, AUY, and HL.

I don’t see us going below the recent 800 level but this doesn’t mean I won’t be cautious for a re-test of the 800 level. This is very common with gold to show great strength and them fall off a cliff again. You can never be too sure of any up move in the gold market. I’m expecting continued strength in gold tomorrow, but will be watching the overnight trading in case I’m wrong.