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.

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.

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.

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.

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.

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 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.

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.

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.