Gold Tech Wreck in the Making (GLD)

We’ve been very excited about gold (GLD) in the last couple of weeks – excited about her impending fall, excited about warning you of the same, and excited that we might make a little scratch off the move.

And what do ya know? Last Friday the bottom began to fall out.

We’re going to address gold’s latest moves in just a moment, and offer you a trade on the old lass. But first, we want to continue down the road of higher options education with another brief lesson on technical tools, their use, function, and effectiveness.

Here’s The Recap

In last weeks article, An Intro to Options, MACD and RSI, we introduced the role of the MACD and RSI indicators.  We then talked about how we employ them to assist us in determining market turns and smart entry points.

Today, we’re going to move on to examine volume and moving averages, again with an eye to discover the most effective means of using these important technical tools.

Technical Analysis 101: The Need for Volume

Any time stocks move up or down with increasing volume it’s a sign there’s conviction behind the move. You can generally trust that the trend will continue, and all things being the same, it’s good practice to piggyback on the swing.

Conversely, a move that develops on weak volume could be susceptible to a quick reversal and should be considered dangerous. Think of it like eight seconds on the back of a rodeo bull.

We like to see massive volume surges before we consider a stock to have topped or bottomed out. It’s worth noting again that one should be wary of any announcements of a secular change of trend without that accompanying volume surge.

Here’s a chart that demonstrates the point well.

It’s five years worth of weekly action for the iShares Silver Trust (NYSE:SLV), a stock that acts as a reasonable proxy for the metal –

As you can see, silver topped in price in the spring of 2011 (in red, top), and the accompanying volume figures (red, bottom) offer absolutely no doubt that the buying had reached manic proportions.

SLV price backed off steeply after this event, and kept on falling for the next four years – The price went from over $48 a share to her most recent lows below $15 in November/December.

But tellingly, each new low over the last two years (boxed in blue) has shown no accompanying surge in volume. That is the reason we find it very difficult to believe that SLV’s final low price has been found.

There will no doubt be a selling event before the decline is through. It will be identifiable both in the volume figures and in the negative media hype that accompanies the move. At that stage, you can consider buying in. Until then, find a better place to lay down your money.

MA discussion - Case Closed

Moving Averages: 201 Paths to the Same Destination

Moving averages (MAs) may be some of the most misunderstood indicators in the chart reader’s tool box.

In the first place, there’s confusion over which MAs are truly reliable. Most folk look to the 50 day and 200 day MA to get their signals.

While it’s true that these certainly are the most widely watched moving averages in the business, it also means they may have worn out their welcome.

Any chart reader who has been in this game for a while will tell you – every indicator has its season. And when everyone leans too heavily on any particular indicator to gauge the market for too long, that indicator tends to lose its efficacy. It’s happened many times over the years to many a stellar marker. Like an old knife that has dulled, these tools simply get overused.

We like the 137 day moving average and its multiples, the 274 and 411 day. But we also run a short term line at 27 or 28 days. We’ve used them exclusively for nearly a decade, and when we have time, we’ll explain our rationale. For now, it would simply eat up more space than we currently have to explain things properly, so we’ll keep it simple. But there’s more about moving averages…

Shocking Admission

The simple truth about moving averages is that it doesn’t matter which ones you use, so long as you’re consistent and you trade according to their crosses in a regimented manner. We’ll show what we mean below. But first, we want to look at a couple of moving average basics – Specifically, lets talk formations that give us clear bullish and bearish indications.

Here’s the iShares China Large Cap ETF (NYSE:FXI) for the last two years. Look closely at the braided look of the moving averages for most of that period (in the blue box), until they unwound fully early last fall.

FXI UNFURLING

The blue box shows the sideways action of the MAs directly before they begin to unfurl. The red lines point to the two crosses higher that lead to a complete unfurling of the MAs by last September. The entire unraveling process takes just over two months and comes in the midst of a very powerful rally.

This was (and still is) a great sign for Chinese equities. The unwinding higher of all moving averages and their continued trending higher is the sine qua non (Editors note: “indistiguisble action or indicator”) of a bullish stock.

The Opposite, and GLD’s moving average

Of course, there’s an opposite to this MA bullish indicator. When moving averages are unfurled and trending lower, you’ve almost certainly got lower prices in the forecast.

Like here –

Gold (GLD) Chart

This is the SPDR Gold Trust (NYSE:GLD) for the last six months. In the next day or two, GLD’s moving averages will be entirely unfurled and trending lower (blue circle), triggering a great deal of technical selling that may send the stock toward a deeply oversold RSI read. As of today, though, we’re not there (black box).

That tells us there will be very strong overhead resistance at the following level, and here’s how we’re going to play it…

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The strong resistance is at the 117 level – precisely where the final cross lower occurs.

And that’s where we’re going to sell CALLs.

Wall Street Elite recommends you consider the sale of the GLD May 117 CALLs for $1.34 each, and use those funds to purchase the GLD May 106 PUTs for $1.25. Total credit on the trade is $0.09.

 

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The strong resistance is at the 117 level – precisely where the final cross lower occurs.

And that’s where we’re going to sell CALLs.

Wall Street Elite recommends you consider the sale of the GLD May 117 CALLs for $1.34 each, and use those funds to purchase the GLD May 106 PUTs for $1.25. Total credit on the trade is $0.09.

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With kind regards,

Hugh L. O’Haynew

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