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.

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.

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.