Breakout or breakdown

GDX is fast approaching a point where it will either break up or break down hard. This is because gold is at the cusp of completing an important pattern. Here is the chart for GLD:

GLD (and gold) has nearly completed a symmetrical triangle. According to Elliott Wave Theory, the triangle should consist of five waves. The blue lines show that it has completed five waves. This should mean a break downward at any moment. This does not mean it will break down, but a break is likely soon, either up or down, and a fast move should follow. Since this is a triangle, and a triangle is often the last consolidation in an up or down move, it should turn up fairly quickly after a breakdown scares everyone. This fits in perfectly with last week's post showing a possible 5th wave due in GDX.
Here is GDX:

As of Friday, GDX closed just below resistance as shown by the blue line. If GDX breaks above this line it is a buy, but you can see by the blue arrows that this type of buy has failed twice in the last five months. A failure is likely again if the gold triangle breaks down. If gold breaks up this line would be a good buy, so buying with a stop below the blue line is a good idea.

A line in the sand

First a disclaimer. I am neither bullish nor bearish on the gold market in the short term. I'd be very happy if a new bull move has started, but I want to be safe if it has not. This post is to present the evidence for both views.

There is a lot of commentary lately about how the correction in the gold market is over and a new bullish move is about to begin. A three month chart of gdx seems to support this view.

There is what looks like a clearly bullish flag on the chart above (shown in black), but there are two caveats. 
First, the flag should have broken out a couple days ago, but instead it fell and violated the support of its first leg down. It can still break up and out and that is what I would prefer.
Second, a bullish flag should be preceded by five clear waves up and there is no way I can find five waves up in this chart. (up waves as I see them in blue)
This next chart is a twelve month chart of gdx which gives a larger perspective.

Starting at the top of the chart, I have drawn five black down waves, followed by three red up waves, followed by five more black down waves that end at the low of 49.22. The 49.22 occurred at the end of December 2011, and in January, the same general pattern as we have now had formed. There were a lot of people calling the bottom at that time as well and the evidence was good. We had a perfect five - three - five pattern creating a large bullish flag. This soon broke down and we had a major wave down to a new low of 39.08. As you can see by the blue lines, GDX has now formed a very large four wave down pattern. The last blue line, which ends with an arrow, shows that the fifth wave has not been completed.
The title of this post is "A line in the sand" and the GDX price of 49.22 is that line. In a five wave pattern, the fourth wave should never overlap the first wave. The first wave down ended at 49.22. So far, the fourth wave has stopped at 48.72. If the bullish flag on the three month chart can break up and over 49.22 with strength, the correction is likely over. If it does it weakly and falls back or fails to exceed 49.22 at all another down wave is possible. To qualify as a fifth wave it merely has to go down to 39.07 and turn, but much lower is possible. A good Fibonacci target is 36.90, but anything is possible.
I think a fifth wave would scare enough people to produce a dramatic high volume reversal and put an end to the correction.
The next chart of the QQQ etf shows another problem:

This chart and the chart for SPY, which generally matches this one, shows that the general market has gone down in five waves (in black) and up in three. (in red) It could still be working on the third leg up, but five waves down, and three waves up imply another five waves down to new lows. If the general market goes down hard again it could pull the gold stocks down with it. This is not always true, but it does happen quite often.
My conclusion is: Don't blindly listen to the consensus, be ready for anything.

GDX on the move

GDX broke out of its recent range to the downside on Friday 4/20/12, so it appears ready to move again. Even with the downside break, the direction this move will take is not clear yet. The same chart is shown twice below with different possible outcomes. The key here is to be ready for either one.

The chart above clearly shows the descending triangle which formed over the past seven days and decisively broke to the downside on Friday. Descending triangles are nearly always bearish and this one proved no exception. Descending triangles also have measuring implications to tell you where to expect the next bottom. This is done by subtracting the base of the triangle ($46.39) from its highest point ($48.33) and then subtracting the result from the base to get the target for the move. Here is the math:
48.33 - 46.39 = 1.94
46.39 - 1.94 = 44.45
$44.45 is the target, but this is not set in stone.
In fact, there is an alternate possibility shown below.

As long as GDX remains above the old low of 45.98 there is the possibility that the last seven days have formed a bullish flag and a new uptrend could begin from here.
I favor a downward move to new lows first, mainly because it give more precise entry points for buyers. Such a move could also provide a needed wash out of sellers to produce a good rally.
In any case, this correction has been going on for a long time now and it is likely that a new uptrend could be substantial and long when it starts.
Happy trading.

When a Flag is Not a Flag: Anatomy of a trading decision

On 4/17/12 GDX produced what appeared to be a flag hanging on a flag pole and I did not buy. Here is an account of the thought process that went into rejecting the flag as false.
Here is the chart which by mid afternoon had me getting ready for a buy:

This is the full day chart and it sure looks like a flag, but there are multiple reasons to reject it.

Reason #1:
The federal reserve meets next Wednesday. If I buy, I'm saying that I believe the low is in. Over the past three years, there have been several times that a major low has occurred near or on the day of a federal reserve meeting. Almost all of those lows occurred during a period starting five days before the meeting until one day after the meeting. There is one outlier that occurred nine days before the meeting. The most recent low in GDX was on 4/10/12, eleven days before the meeting. The most recent low in HUI was on 4/4/12, fourteen days before the meeting. Statistically, there should be another low coming. This would not stop me from buying if it were the only negative, but it added to the list of other negatives.

Same chart new lines:

Reason #2:
A broken flag. This flag is drawn with a line between the two highs that straddle the first low, and a parallel line from that first low. This clearly shows that prices broke below the bottom line, went back up to test it, fell again, and remained lower. This is a warning sign, but not a clear indication of danger. If GDX had done exactly as above, but was resting on a clear support, I would have bought, especially with the rally in the last couple of minutes.

A chart full of problems:

Reason #3:
We are still just below a very major resistance at 48.05, marked by the black line above. This is not only the resistance built up a couple weeks ago, but it is also very close to the same resistance line of the broken 18 month long megaphone pattern shown in earlier posts. However, this alone would not keep me out if the flag was good.

Reason #4:
The flag fell through support at the same time that the flag broke down. This support is marked by the red line with two arrows showing he points where the support was building. (Marked as support and resistance)
This is enough to abort the buy. A good flag should rest on support.

Reason #5:
There is a broken down bearish flag on the chart. (Marked in blue) Normally, this flag would be invalid because the top line starts before the low, but HUI has a different low which is before the line and HUI has to confirm the trades. On the morning of our flag, GDX (and HUI) broke back into the bottom of the bearish flag. (Marked as break out) This is bullish, and alerted me to the possibility of a flag buy. A couple of hours later, GDX broke down again, which is bearish. This was also enough, on its own, to stop the buy.

I watched right up until the end of the day, because if GDX would have flown higher in the last half hour to close above the blue channel line, I would have bought. This would have closed it above the red support and it would have "fixed" the flag breakdown.

Support and Resistance again

The situation with GDX is little changed for the past week. Support and resistance are still the same and GDX is still wallowing below the red resistance lines.

The black support line is a line I identified over a week ago as minor resistance. Since that time, it has been hit twice from below and it is now near a test from above after breaking above two days ago. The black line is now major support and should be watched closely.
Happy trading.

Support and Resistance Revisited

GDX had a nice rally on Thursday which could be the start of something big, but first it has some major resistance to work its way through.

These are the same support and resistance lines shown in a post a few days ago. The green support held nicely and GDX has risen up to test the red resistance area. It spent half the day on Thursday chipping away at the supply of sellers in that area without backing down. Buyers were coming in to equal the demand of the sellers. A clear close above both red lines would be bullish and a new close below them would be bearish. Either way, there is still a lot of supply above and demand below to hold it from going too far without some new push.
Happy trading.

GDX and GDXJ

GDX traded higher yesterday and appeared ready to make a flag, but there were three problems.
The first was that it made a pennant not a flag. This leaves open the possibility of a drop from here or a quick rise and then a drop.
The second problem was with HUI. As mentioned in the previous post, HUI never went lower on Thursday like GDX did. This makes the two day pattern on HUI into a bearish flag with the same implications as problem one.
The third problem is with GDXJ. GDXJ is an ETF like GDX, but the stocks that are in it are junior or more speculative gold miners. The stocks that make up GDX are older, established mines. This makes GDXJ even more volatile than GDX. GDXJ made a new low for this move yesterday, closing below the lows from last Wednesday and Thursday.
Here are the charts:

The major support and resistance lines are the same in the chart above as they were in Friday's post.
The last bar appears to have formed a flag, but this was after hours trading and occurred nowhere else.
Note how the blue resistance line repelled it yesterday morning.

The chart for GDXJ is similar, but weaker. See how there was no messing around yesterday as it dropped to new lows for the move. I will still use GDX and HUI for all analysis, but I wanted to show how different charts of essentially the same market can differ and introduce uncertainty.
GDXJ is well traded with strong volume so it is definitely a worthy trading ETF.
Happy Trading.

GDX support and resistance

Where does GDX go from here? There is a lot of open space below with only very old support (older than 22 months).The more recent the support, the better it usually is, but some of the old support comes from years of testing highs or lows and can also be powerful. Since GDX is very over sold, and I want to be an optimist today, I will focus on recent price action and what it can mean for a possible rise. Here is an eighteen day chart:

The upper blue and lower red resistance lines are the top and bottom of the range that GDX was in for three weeks. With all of the buying at the red lines and all the selling at the upper blue line these lines should be quite strong for a while.
The lower blue line is the long term support / resistance line that trading was focused around for those three weeks.
The two red lines were support for those three weeks and now are powerful resistance and here is why. A lot of people bought in that area over those three weeks and are now down by quite a bit after the drop. Many of these people are looking for an exit so, if prices approach their break even point, they will sell, creating downward pressure on prices. At the same time, people who missed the drop will see a rise back up to the red lines as an opportunity to sell short, also pushing prices down.
Incidentally, the avoidance of these psychological pressures to buy or sell is a prime reason for buying at support areas and using tight stops. Without the worry of being down, you can make far more intelligent decisions in your trading.
Yesterday, GDX and HUI both had double bottoms with GDX going slightly lower than the previous day and HUI staying a little above. The new green support line is at the double bottom. The peak between the bottoms is the minor resistance line.
The key to a good buy on GDX would be a flag above support. I'm not too excited about the double bottom because of the measuring implications of this bottom. If the peak between the bottoms is taken out, GDX should go up the same distance above the peak as the bottom is below the peak. Roughly, 47-46 = 1 and 1+47 = 48, so the target is the red resistance line at 48. I don't generally look for quick day trades, but would rather get the bigger trends. I see two ways to get a new trend going. One is a flag above the double bottom, but below the black minor resistance. This could give the power needed to overcome the red resistance lines in one push. The other, more powerful change to watch for would be a strong push back over the red lines followed by a flag down to test those lines. These are what I will be watching for.
Happy trading.

SOLD or The Importance of Stop orders

Yesterday's potential inverse head and shoulders pattern died an untimely death this morning. A gap down below all support stopped me out at the open for a small loss. Take a look at the chart below and you can quickly see how important the stop was. GDX went down another 3.6 % after I was stopped out.
Stops are important, not only to save your cash when a trade goes against you, but being stopped out allows you to put the trade behind you and plan for the next one. I'm not staring at the computer screen trying to will GDX to go up. Instead I'm watching for the next set up. It doesn't matter if I buy the next one higher or lower, it only matters that it goes up after I buy.

So now GDX is below all of the support for the past 22 months. It could go a lot lower fast. I need to wait for an obvious flag to buy now. During the three month meltdown of 2008 there were four profitable buy flags and two breakouts above a rising channel, all of which were good buys, so even if it heads down from here, there can be several good buys along the way.

BOUGHT !

In yesterday's post I described the various support levels under the current (yesterday's) price. The first support was tested from above and underneath for several hours before it finally broke and when it broke, it plunged. The plunge was said to be because of the release of the last Federal Reserve meeting minutes and the lack of discussion about QE 28 (or whatever number we're on now). We know that it would have happened anyway and that was just the excuse.
The second support held beautifully. GDX went $0.07 below and turned up on very strong volume. HUI went $0.15 below and also turned up nicely. I bought right after the bottom as soon as the turn was confirmed.
Here are the charts for both:

I was expecting this turn because of the very nice inverse head and shoulders which was forming on the charts. This pattern occurs several times a year at major turning points and comes with the advantages of predictable turning points and nice tight stops so there is relatively little risk to the trade. These trades do fail at times but they have a remarkably high success rate of near 80%. As long as you keep a stop loss price in below support, the trade is very safe.

As you can see, the chart for HUI is very symmetrical, with a nice flat neck line. This bodes well for the trade. The shoulder support can be tested several times over the next few days, but often it is hit just once and away it goes. It looks like a five wave decline so it could go up part way to the neckline and then come down to violate today's low slightly before turning higher, creating a multi day flag. I will not be too quick to raise my stop price.
Happy Trading.

Good news for Goldbugs

GDX and HUI surged up above the bottom of the megaphone pattern today. This puts control back in the bull camp for now. GDX and all gold stocks are very over-sold after a month of heading down, so I'm hoping for a nice bounce here, or better yet, a nice new uptrend. Here is the GDX chart for the past 14 days:

After a very brief and very small drop this morning GDX surged up through the upper red support line (which was resistance until today) and went all the way to the upper channel line before consolidating for the rest of the day. HUI did the same, but actually reached the blue resistance line before falling back and closing below both the channel line and the resistance line. GDX has not tested either of the red support lines yet and either of them would make sense from here. If GDX goes up to the blue resistance line in the morning, and then falls, the upper red line may contain any drop creating a bullish flag. A fall all of the way to the lower line and then a turn up would also be a bullish flag, just not as bullish.
A consolidation right were it is tomorrow with a rise and a close over the blue resistance would be immediately bullish.
A five or six day flag will often form in situations similar to this. It could form below the channel line, likely using the bottom support to hold it up, or it could jump out of the channel and form above the channel line, but possibly dipping down to the upper support line by the end of the flag formation.
As noted on Friday, the MACD crossed the zero line today, lending some technical support to both GDX and HUI.
Happy trading.

Still hanging in there

GDX tested the resistance of the megaphone pattern this morning and then dropped like a rock. This is what happened in 2008 and it looked like a big drop could be happening again, however, it reversed and went back up to test the resistance again at the close. The resistance has not been broken yet, but now there is some support below as well. Here are the charts:

This chart shows all of Friday in one minute increments. You can see the morning drop and the reversal at about 10:30 AM. GDX went back up to test the resistance again and exceeded the morning high for a minute or two. The new high was important because it prevented the afternoon run from being a bearish flag. HUI also exceeded the morning high and actually closed four cents above it, but still below the resistance. A jump over the resistance appears imminent and any run up on Monday will be accompanied by a new MACD buy signal bringing in new money if sustainable support can be established.
On the less optimistic side, GDX and HUI closed again below the resistance and they closed with bearish hanging man candle sticks.

In the last thirteen days GDX has tested the black line fourteen times, first as support, now as resistance. This chart should make it clear how important this area is going forward. There is also some support below created by the low of 48.42 and the new low that occurred Thursday at 48.05. If it drops on Monday instead of jumping the resistance, we could see a turn at the 48.42 area or even the 48.05 if the first support fails.
If it jumps the resistance line it is possible it will not come back down to test it, but it could hang for two days at the highs near 51 before going up again. A nice rise followed by a flag down to the resistance / support line would be a better entry point if that happens instead.
Happy trading.

Its not safe yet

GDX made a bullish hammer candle today, but there are still two layers of resistance to plow through before we have clear sailing. I'm using charts of HUI, the gold bugs index, as a proxy for GDX today because the resistance lines are clearer on it.

The red lines are the bearish flag that finished yesterday. HUI closed just barely under the bottom line in what could be a test of the flag before a drop. GDX closed farther below the bottom line than HUI did. Both are likely to jump that resistance in the morning, but the other resistance, represented by the nearly horizontal black line, is far more critical. A bigger view shows what it is:

The black line on the first chart is the same as the second chart. It is the bottom of the giant megaphone pattern and HUI has been testing and retesting it for over two weeks now. I don't like that it gapped under the line on Wednesday and I think that gap will now be tested. I would find it extremely ominous if HUI opened at that line and then went down for the day. It would be even worse if HUI closed below the bottom bearish flag line after testing the upper resistance. GDX and HUI nearly always track one another very well and it is good to check the HUI as well as GDX for your GDX trades. The black line on HUI is just over 474 and this corresponds to about 49.78 on GDX.
By the way, on July 30th 2008 gdx closed with a bullish hammer and the next day it gapped up to test a breakdown and then fell for almost three months. I hope that doesn't happen here.
Happy trading.

GDX forms a bearish flag

GDX gapped down this morning and dropped enough to create a bearish flag. Hers are the charts:

The chart above shows how the bull flag failed and the subsequent drop has created a bearish flag. Note how after the gap down GDX rose back up just enough to test the channel line and then dropped.

Yesterday's chart showed the five wave rise starting at the C point and the flag afterward, but everything needs to be taken in context. I had failed to see the earlier five wave rise. What we now end up with is a five wave rise, followed by an A-B-C decline and then another five wave rise. This is the exact internal structure one would expect in a bearish flag. The bottom trend line of the bearish flag has been broken and tested, so unless GDX can quickly rise above the bottom flag line and stay there, a large decline is likely.

As always, I trade what I see happen, not what I think will happen, so if GDX heads up instead, I will wait for a bullish flag and buy.



Happy trading.

I still have not bought gdx - 3/27/12

In the last four days GDX made a new bottom followed by a five wave flagpole that broke out of a month long downtrend channel. After breaking out it formed a two day, three wave, flag that rested on the downtrend channel break out. The description sounds almost perfect, but I didn't buy and GDX is lower this morning. Why did I not buy what appears to be a perfect set up?
I will describe what happened with the charts. The top chart is a four week long, ten minute bar, candlestick chart of GDX. And the lower chart is the last eight days of the top chart.

The chart above shows the channel, the break out, and the two day flag. This chart ends on 3/27/12.

This chart is the same as the end of the first chart. First we have the double bottom which occurred on 3/22/12. The second bottom was $0.03 above the first. It would have been nice to buy there and make a few percent, but I mistook the weak flag that formed for a triangle and thought it would go down the next day. After the second bottom, the five waves up are labeled 1 -5 and the two waves down are labelled A, B, & "C?"  Most of my buys are single day flags, but I do buy multiple day flags when the set up is right and this looked right.
The first hint of a problem came just before the point labeled B which is at the end of a one day bearish flag. In the last few seconds of trading that day I saw at least 10 blocks of 20,000 or more shares sell. Normally, those that bought in at the bottom would not sell all of their shares just after a channel break out, but the big players were definitely selling. That told me to watch out.
The next day, 3/27/12, GDX formed a very nice flag resting right on support, but the gold bugs index ($HUI) spent most of the last ten minutes of the day below support, only managing to peak above it at the close. This was another warning.
The end of a two day flag usually rises off the support and ends up forming a white candlestick on the daily chart, but this flag formed a black, bearish engulfing candlestick the day after a hanging man candle stick. That's double bearish and another warning.
The last half hour of trading in the general market was marked by a series of new lows for the day, forming bearish shooting star candles on the charts. If the general market goes down, it can easily pull gold stocks down. Another warning.
Finally, only two of the ten big sellers bought back at the end of the day on 3/27/12. If it was truly a bullish flag, I would expect them all to buy back in. That was enough for me and I decided to wait for confirmation. GDX is plunging today so I'm still waiting.
Happy trading.

Apology

I have not been posting much recently. The vast majority of my chart analysis is done on intraday charts. I have been waiting for permission to use some good intraday charts on my blog. Without a posted chart, it is hard to understand my analysis at times, so I end up with short postings without much information. I received the necessary permission yesterday evening. Here is an example of the new charts I will be using:

This is a daily chart, but the intraday charts will be just as clear. I have been using daily charts from stockcharts.com, because their website grants permission to freely post them if attributed to them. I appreciate that stockcharts.com allows this and I think their chart service and trader education are very good, but I will now use the charts shown above exclusively.
I apologize for the lack of postings and will now star posting more often, concentrating on GDX.
Happy trading.

A little better for GDX

GDX and HUI climbed above their most recent old low on Friday, but HUI fell back below it well before the close. It ended up almost exactly on the bottom trend line of the eighteen month megaphone pattern. It is encouraging that it was able to get above the old low and the trend line for part of the day rather than just falling off the cliff it has been sitting on for eight days now, but it is still a bit below its last major bottom. A big gap up on Monday with a gradual decline to rest above the old low from eight days previous could be a buy set up tomorrow, but I'd rather see a decline to test Thursday's low followed by a rise on Tuesday or Wednesday for a better buy.
Once again, we are still on the edge and any buy could be risky, so I'm waiting for the proper set up.

QQQ made a small hammer Friday, but at 2.2% above the trendline is too risky for me. Perhaps both QQQ and GDX will decline into buys around Tuesday. That would be ideal for either one, but ideal rarely happens.

GDX still hanging by a thread

I haven't written in a couple days because I have been concentrating on my GDX charts. I was ready to buy on both Tuesday and Wednesday, but the charts did not cooperate. Yesterday (Wednesday) I believed we would get a bullish flag above support for most of the day and was ready to jump in until the flag on GDX and support on HUI were breached in the final 15 minutes of trading. It looks poised to drop this morning, just as those breaches yesterday foretold. This does not mean it can't turn around from here, it only means that it has not turned yet.
I've mentioned before that chart patterns repeat again and again, making technical analysis possible. However, they never repeat exactly, it is more like they rhyme. Take a look at these two charts. The first one is from the break down in July of 2008 and the second one is today.

Chart courtesy of StockCharts.com


GDX break down 2008


Chart courtesy of StockCharts.com


GDX possible break down 2012


Notice how similar the charts are, especially within the ovals. Both are making nearly the same pattern right at the support of an old low. These patterns were preceded by the break down of a bearish flag in both cases. A lot of large orders were filled yesterday and also on Tuesday at the close. It appears that people are making their bets either short or long. We should know in a day or two. It fell quickly from here in 2008.

Something else to note is the bearish shooting star candle on QQQ yesterday. In 2008 the gold stocks led the rest of the market down and turned up again before the rest of the market. I'm more bullish on the market as a whole right now than I was in 2008, so this may not happen here.

GDX on the precipice

GDX has reached the decision area. What it does in the next few days could determine its direction for quite a while. If you look at a GDX chart you will see that it has not quite reached the bottom of the megaphone pattern. This is deceptive because the HUI index is sitting right on the bottom as shown in the chart below:

Chart courtesy of StockCharts.com

If the HUI breaks through the bottom and stays below for several days, it could signal the start of a very large decline in GDX as explained in the March 14 post.
GDX made a very weak looking, two day flag ending on Friday so we do have the possibility of rising up off this bottom once again, but it is time to be careful.
I wrote the above on Sunday evening and now it is 3:00 PM Monday. The small, two day flag broke out to the upside, but only for a few minutes, before falling back in this morning. It now appears to be a bearish pennant, which would imply another move down if it breaks down. It has not broken yet, but is very close right now.
Happy trading.

Update -3/15/12 - 1:00 PM

GDX opened a few pennies higher this morning and has swung up and down since. It is consolidating for another move in one direction or the other. HUI closed above the old low yesterday, but just barely, and has swung below it a few times today. There is no buying or selling pressure right now so volume is decreasing. Everyone seems to be waiting and making their bets on the direction it will go next.
If it is going to go up again from here I should get a buy signal flag sometime in the next four days somewhere between 50 and 52. It could drop to a new low and then recover and give a buy signal near the low end of the range or shoot up for a day or two before making a flag down to the low of seven days ago, at the upper end of the range.

In spite of the big megaphone pattern on the charts, I have no opinion as to which way GDX will break. The fundamental situation, with the US essentially bankrupt and the fed increasing the money supply like crazy argue for it to go up, but there is a perception taking hold the the worst has passed and that could send it down. I will just wait and buy when a signal occurs.

QQQ is definitely being driven by the idea that things are getting better along with the liquidity injected by the Fed. QQQ is higher again today with it new MACD buy signal. I won't touch it without a pull back to the trend.

3/14/12 - 2:00 PM

GDX is down nearly 4% this afternoon, destroying all hope for a flag buy above the low from 3/6/12. The HUI gold bugs index hit a new 18 month low this morning before bouncing back up a little. The only possibility for a buy today would be a dramatic climb that goes above and stays above 51.64 for the final ten minutes of the trading day. This appears unlikely right now.
More likely, the area around 51.64 will now act as resistance if GDX can climb back up near it. It could be stuck in the range between the mid 49s and 51.64 for a few days. An ideal setup would  have GDX wander up and down in that range and form a flag in two or three days, but there could be other problems looming.
The fact that HUI made a new low puts the possibility of a huge waterfall decline back on the table once again. There is a very large megaphone pattern on the daily chart and if it breaks and can't quickly recover, the target for the decline is near 28. This is only speculation at the moment because no break has occurred.

Chart courtesy of StockCharts.com

18 month daily chart of GDX

The red lines denote the boundaries of the megaphone and the blue line is what a megaphone breakdown would likely look like. The one good possibility from this is that after the last such decline in 2008, there were huge profits to be made on the way up.

QQQ

As I thought, QQQ has given a new MACD buy signal today, but it is too far above the trend line to be safe to buy. The best bet is to wait for a test of the trend line before jumping back in. I will definitely wait because, if a waterfall decline does happen in the gold stocks, it is likely to be in conjunction with a top and a big decline in all stocks as well.

Happy trading.

QQQ update 3/13/12

QQQ gapped up and went to new highs today. Unless it really surges in the last 40 minutes it will still be on a MACD sell. It is very likely to give a buy tomorrow, but the risk is quite high right now. The stop is 64.37 which is a risk of 2.5 %. A test of the gap or the old high in the next day or so with a MACD buy signal would be a safer entry point.
Happy trading.

GDX update - 3/13/12

I thought GDX might form a flag today, but the low of the flag went lower than the bottom of the pole so it can not be a flag today. This doesn't mean it won't go up tomorrow, it just means there is too much risk in either direction for a buy. A gap up tomorrow with a flag testing an old low would be a buy, but it is not there yet. There are actually several possibilities for tomorrow which I will be watching.
Happy trading.

Fundamental Analysis or Technical Analysis?

One of my worst trades ever was buying Home Depot stock. I had read a lot of books about fundamental analysis. I learned how to look at PE ratios and book value and a host of other metrics to see if a stock was a good buy. I opened a brokerage account and I thought I was ready.
It was the late 1990s and everything was going up in the US markets. Home Depot announced earnings that beat the estimates, the stock jumped up, I bought, the stock went down. It just started to steadily decline as I watched day after day waiting for those great earnings to send it soaring. Everything else was going up. Companies that lost money every quarter were soaring, but Home Depot, with its great earnings, continued to drop. I eventually sold, losing money, but gaining knowledge.
I lost money in the 1990s while everything soared. I put everything on hold and bought: Technical Analysis of the Financial Markets by John J. Murphy. I read that and several other books on technical analysis before buying stocks again. That is when I became a trader.
Here is what I learned from those books:
Fundamental analysis tells you what everybody should think about a stock.
Technical analysis tells you what everybody really thinks about a stock.
Think about that for a minute. What really matters when you buy a stock? Do you want to own a stock that you think is great because of its great fundamentals, but nobody else cares about? No, you want to own the stock that doesn't make any money, has bad management, poor future prospects, and the whole rest of the world wants to own.
People are not always rational. The dot com boom and crack up proved that people are not always rational in their investments.
You may argue that those bad dot com companies did crash and burn in the end as fundamental analysis would predict. Yes, but when that happened, technical analysis was predicting the same thing. The difference is that technical analysis was right up and down, not just half the time.
There are a lot of tools for technical analysis, but I would advise you to stick with the basics of chart pattern analysis, candlesticks, MACD, stochastics, and maybe rsi. Too many indicators can over confuse the situation and make things worse. Pick the ones you like and stick with them.
Happy trading.

Why I did not buy Friday's "Flag" in GDX

If you look at the action in GDX on Friday, without the perspective of the days preceding it, it looks like a perfect flag buy signal. Yet I did not buy and did not send out a buy alert to my subscribers. In fact, I told them not to buy. Why is that? Here is Friday's chart:




There is a nice strong flag pole followed by a nearly perfect looking flag. The volume was right and everything looked good, but only from the perspective of that single day. The top of the flag was bumping up near the resistance of a previous breakdown, but even that doesn't normally stop me from buying a flag.
Here is a little wider view of what happened:




The first chart is contained within the oval on the second chart. Notice how the beginning of Friday's "flag" was actually a breakdown from the original flag pole outlined in the green lines. This was good because my definition of a buyable flag requires a channel break down from the flag pole. The next thing it did on Friday was climb back into the flag pole channel and go to a new high for the move. The new high negated the flag pole channel break that occurred earlier so now prices were still in the flagpole and stayed there for most of the rest of the day.
The new high also caused me to adjust the flag pole bottom downward to include Friday morning's low. So now you see that the flag pole channel had not been broken on Friday, so a flag could not form.
Today is a different story. The new flag pole channel, outlined in red, was decisively broken this morning and gives me hope that a flag could form here. A buy today is unlikely because the bottom of the flag pole should be tested before a flag forms and that will take some time. A two day flag is entirely possible for today and tomorrow, giving the possibility of a buy for tomorrow afternoon.
Another possibility for tomorrow is a drop to new lows. This would not be a flag, but would open up other buying opportunities. Stay tuned.
Happy trading.

Still waiting

This morning gold was holding steady before the market open until the jobs report was released at 8:30 and gold plunged. It stayed down until after the market open, bringing GDX down to the support of a low from 15 days ago. The support held as gold reversed and shot up higher than yesterday. GDX also went higher than yesterday on the reversal, creating what is, so far, a bullish engulfing pattern.
There has still not been a full day flag on this move up from the bottom, but if it keeps going up it will soon encounter the 50 day moving average which could trigger a flag, either above or below the average, depending on the buying strength. I will continue to wait for a full day flag for a safer entry point.

QQQ barely hit a new high this morning with its MACD still negative. I still think thee is a good chance of getting a little more consolidation here before any solid move up and a new buy signal. Remember the Federal Reserve meeting is on Tuesday, and that may set the direction of the markets afterward.

GDX and QQQ update

GDX has crept a little higher today, but has still not broken out of its down trend channel. Yesterday's hammer candle was not good and today it appears to be forming a new hammer slightly higher than yesterday's. The trouble is, a higher hammer is a hanging man candle. The price action has been very choppy today and appears to be just testing its break down that occurred yesterday. It is hard to see how a good flag could form today, so a buy is unlikely.

QQQ has risen nicely since yesterday's sell, but also appears to be testing the break down from its two month trend line. The MACD has a wider divergence today than it did yesterday, in spite of the rise in prices. I still hope that a flag will form here and allow a continuing rise to occur thereafter, but I need to wait for a positive MACD and either a trend line break or a break to new highs before buying again.

Happy trading.

GDX update 5 - still heading down

GDX gapped lower this morning, went down until 10:24, and has been trading in a range since then. Significantly, GDX opened at 52.55 and headed down from there. This is notable because 52.66 would have been the bottom of our ideal flag and it opened below that.
The possibility of the double top and a move to new lows is now in play, however, it still has a day or two to recover and salvage the big flag so don't count it out yet. We could end up with a flag day and a buy very soon and it would head up again. We could also end up with a hammer today, but I wouldn't trust it, if it closed below 52.70
I would like to see it head up again quickly, because GDX is set up quite closely to the way it was in June of 2008, a month before the huge market meltdown signalled a very bad economy to come. We could do without that again.

QQQ

Sell QQQ if it closes below 64.00 today. It is quite possible that this is merely a flag forming in the trend, but we don't know until it happens. I think everyone is nervous about the fed meeting on Tuesday, next week, so the price may just chop up and down in this area for a week. For now, a close below 64.00 is a MACD sell signal. If it goes to a new high after the fed meeting, we could get a buy signal. Alternatively, it could head down to near 61.50 to bounce off the 50 day moving average or down to 59.20 to the support of the old high.

Don't sell QQQ - yet

QQQ has barely broken the blue up trend line today, but I would give it just a little room here. You can see that it is trying to find support above the highs from a two weeks ago. If it can hold there, above the green support line, it will likely try to go higher again. Wait for a close below the green support line before selling, but if it does close below, it is time to sell with the MACD now pointing down.


Chart courtesy of StockCharts.com

Eventually, when support is broken, QQQ is likely to head down to near the red line which is the support of a previous high. At that point it would be time to consider buying again and drawing a new up trend support line.

GDX update 4 - Large flag forming

Gdx has taken quite a hit today, but it is after such big runs down that the best opportunities can occur.
I am now watching the possibility of a large, one month long, flag forming. Here is the chart so far today:

Chart courtesy of StockCharts.com

GDX - 4 month daily chart 3-5-12

Look at the very slight downward slope of the top blue line. That is the top of the flag. If GDX goes down to 52.66 and turns there it will form a perfect flag in more ways than one. A bottom of 52.66 would be a .6055 retrace of the move up from the bottom of 49.22 on December 29. This is very close to the ideal Fibonacci number of .618 discovered by the famous 11th century mathematician, Leonardo of Pisa. This number is found in the design of many natural elements and in many human endevours, including the stock market.
Assuming that the move to 57.94 was a first wave, a flag of this magnitude would give us a third wave target of 66.77 which is just two cents below the all time high.
There is also the bearish possibility that it has formed a double top. In that case, a couple of closes below 52.66 could send GDX dropping to a target of 47.41, a new yearly low.
I will be monitoring it closely.
Happy trading.

Elliott wave and intraday trading

There was some confusion over my use of Elliott Wave theory to examine GDX in a recent post. I'm certainly not an expert in Elliot Wave theory, but I know the basics and these can be a great help in trying to figure out market direction and finding the end of a correction. I do not trade based on Elliott Wave theory, but I do get ready to pull the trigger on a trade when I see the correct patterns developing. Here is a chart I used recently which shows five up waves:






 Here are the basics of Elliott Wave theory:
1) A move in the direction of the main trend consists of five waves (labeled 1 -5 on the chart above)
2) A move against the trend (a correction) consists of three waves, usually designated as A - B - C.
3) Wave three can not be the shortest wave of waves one, three, and five.
4) Wave four can not overlap wave one.
5) Wave two can not go lower than the start of wave one.
6) The waves are fractal, which means each wave can be subdivided into smaller waves and each of them can be divided again into still smaller waves.

On the chart above, wave one is from the bottom up to the number 1 and ends at the number 1, wave two starts at the number 1 and ends at the number 2 and so forth.

Note that the congested area inside the green ellipse can not be designated as waves three and four for two reasons. First, the lower part of the congestion overlaps wave one and violates rule four above. Second, using the top of the congested area as wave three makes wave three too short, violating rule three.

Note how all of the rules are met by the count I have shown and a decline immediately ensued.
Here is a chart of what has happened since the original chart:



 The red number 5 is in the same place as the number 5 on the first chart. Prices declined from the 5 in an A wave, went back up in a B wave and then started down for the C wave.
Remember how I said the waves are fractal? The C wave is shown here divided into five waves with blue numbers.
So why, you ask, did it go up in a sixth wave and down again in a seventh to where the "C?" is?
Once again, the waves are fractal so wave number five is itself dividing into five waves which, combined with the first four waves will look like nine waves down on the chart.
Confusing? Sometimes.
Helpful? Sometimes.
That's why I watch it, but don't trade by it.
Happy trading.

Price channel break and a trading flag

For swing trading I use price channel breaks and flags for both my buy and sell signals. A channel price break signifies a change in trend. A buy occurs when prices are dropping in a down trending channel and then something happens causing the price to break out above the channel line. Below, I have an example of a price channel break and a trading flag which is a buy.

Price extremes form a shallow up trend channel after a large spike up at the beginning of this chart. This uptrend channel is shown in blue. Up trend channels are drawn by placing a rising line between the two highest highs and then drawing a parallel line from the lowest price that occurs between them. A price drop below that parallel line is an indication that the trend is ending. Often, a certain percentage below that channel is used as a stop loss price where your stock would sell to limit the amount of profit you give back.

Once that channel is broken, and two down sloping lows form on the chart, a down trend channel can be drawn. This channel is in red and is drawn with a line between the two lows and a parallel line drawn from the highest price between those lows. Prices broke above the channel three times before giving up and heading down. After an up channel break down, I ignore these first price break outs from the new down trend because they are only testing the break down. There is a time when they are buys, but it is rare and not the subject of this post.

After prices break lower again, a new, wider, and more sustainable down trend channel has formed. (shown in green) This is the one we want to see prices break out of for a buy and, after several days, that is what happens. After such a break out, a flag nearly always forms. The flag, shown in orange, is ideal for end-of-day trading because it rests right on top of the green channel and rests on the support of an old low, in red. This flag is what this blog and my website are named for. A buy at the end of the flag day is an excellent entry point and the next morning prices gap higher and head up.
There are times when the flag straddles the down trend line, but still rests on an old high or low, and other times when the flag doesn't form until after a very large rise. These can still be bought if they rest on support.
This type of buy has very limited risk because a stop can be placed just under the old low, often risking less than one percent on the trade.
Happy trading.

Gdx update 3

This is just a quick update to say that GDX is now forming the fifth of five down waves in the C leg of this correction. There is no indication of heavy buying coming in yet and it is continuing downward at this time. There is a price gap that has almost been filled. Just a little more down would do it. GDX is at 54.56 right now and has created a good multi day flag, but the possibility exists that is could continue down to below 52.85 to create a multi week flag.
QQQ is also giving some back today, but is not a sell yet because it is well above its trend line. Stay tuned.
Happy trading.

GDX update 2

Yesterday, I said that the formation of a pennant would likely lead to a bottom test soon. That bottom test is happening this morning. GDX has gone lower than its low from two days ago and is above that low at the moment. It has now formed a three day flag, but it may not be done yet.

The top between A and 1 was yesterday morning and should be labeled B. This is the wave count as I see it this morning. A triangle at 3 - C would indicate one final wave down to a bottom later today or possibly Monday morning. Gold has gone down some today, but has yet to test its bottom from two days ago. A buy appears to be possible soon.
Happy trading.

GDX update

After yesterday's big decline GDX has regained about 50% of the loss at today's high, but it appears to lack any real push to the upside. It is normal after a big one day drop to see some consolidation before the market decides which way it will go. It would also be normal to see yesterday's bottom tested with a flag. Declining volume this afternoon is consistent with flag formation, but it will need to go down some more to do it right.
If it forms a small symmetrical triangle, or pennant, this afternoon and breaks up, I would still expect a test of the bottom tomorrow or soon thereafter.




 

Elliott wave theory says that markets move five waves in the direction of the trend, and then three waves opposite the trend for a correction.
Yesterday morning's high was slightly higher than it went four days before and qualifies as the top of a fifth wave in the latest up move. A five wave move suggests that there will be another move to the upside after a three wave decline. Whether or not there has already been an A-B-C, or three wave decline is subject to interpretation.




 

The chart above shows how a three wave down move could have already completed.
There was a quick five wave decline to form the A wave. This was followed by a triangle to form the B wave. A quick move below the low of the triangle could have formed the C wave.
If  this is the case, I would expect a flag to form soon without a new low. If my interpretation is wrong, and that is quite possible, then a new low, below yesterday's low, would complete the three wave down requirement. After that new low there should be a flag forming to start the next move up.
Happy trading.

When should I take profits on QQQ?

On the first trading day of 2012 the exchange traded fund QQQ broke out of a two month triangle consolidation. If you bought this ETF on the breakout day, you are now sitting on a paper profit of 13%. Here is the chart with the triangle in blue and a steadily rising trend line in green:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - 2/28/12

 



  This trend has been going steady now for two months. How high will it go? I have no idea. That is why I need a plan for when to take profits and when to hold on. These rises often last for 5 - 12 months, but there can be some corrections along the way. One of the best ways to hold on to your profits is to use the moving average convergence / divergence, or MACD, indicator in conjunction with the rising trend line. The MACD indicator is a momentum indicator showing if the trend is getting weaker or stronger. When the black line passes above the red line on the MACD plot, the trend is getting stronger. When the red line is on top, the trend is weakening. This is also shown as a negative reading in the histogram (blue bars). As long as the black line is on top, just keep drawing a trend line connecting the lowest daily lows to each other. When the red line is on top, as it is in the chart above, and the closing price goes below the trend line, it is time to sell. The ten day moving average, which is plotted on the chart above, can be used in place of the trend line. Just sell when the stock closes below the ten day moving average and the MACD is negative.

Here is an example from 2010:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - November 2010




The triangle breakout occurred on September 13 in the chart above. The lower green trend line is drawn from low to low as long as the MACD is positive. If the MACD goes negative and the trend line is broken, as happened on October 4, that is a sell. In this case, the sell may have been inadvisable because it was just testing the support of the old high (lower black line). If you sold, a new buy was possible when prices broke above the last high (upper black line) and the MACD went positive. This happened on October 13. Finally, on November 11, the trend line was broken and the MACD was negative for a sell.
MACD is especially useful after a big pattern breakout, like the triangles above, but can get tough to use in a choppy market.
Happy trading.

Why I always use sell stops

This morning gold fell $70 an ounce in one hour. Gdx fell $2.55 at the same time and went down even further a little later.
Yesterday, both GDX and HUI, the gold bugs index, closed above their 200 day moving averages, resulting in heavy buying (and selling) at the close. My computer shows over one million shares of GDX changed hands in the last minute of trading yesterday. Everyone who bought then, and didn't set a stop, is now down 3.5%.
What caused this market mayhem? Ben Bernanke spoke to Congress.


Whatever you are trading, you should enter a stop loss order to limit your risk when you are not watching. The stop loss order will sell your stock as soon as the price gets down to a price you have determined ahead of time. This takes the emotion out of your decisions to sell and helps you sleep at night.

Even if you use a full service broker (although I'm not sure why a trader would not use a discount broker) you need to make sure they physically set a stop loss order for you rather than just watching and hoping they can get to it.

So how do you determine your stop price? Trend line support, old highs, and old lows are all valid places to put your stop. Do not put the stop right at the line. Give it a little room so a minor violation of support will not send you out at the low. How much room will be determined by experience. Look back and see how much support was violated on other occasions, but still ended up holding.

Happy trading.