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Tactical Technician
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I like TA, and I especially like it when I'm right.
  • Still Waiting For Signs Of A Dead Cat Bounce 0 comments
    May 27, 2013 9:05 PM | about stocks: GLD

    Despite this week's "bounce" in gold and gold stocks, I am still not sold on the idea that the worst is over for precious metals. Of course, I agree with anyone who claims gold stocks are cheap when compared to the commodity, but it won't matter if gold, itself, continues on its downward path. The ratio could improve, all that has to happen is that gold stocks fall at a lessor pace than gold, as we move further into 2013.

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    Ratio analysis can provide us with some important information from time-to-time, but it can't predict when one of the two trading vehicles that make up the ratios will stop rising or falling. That is the issue with ratio analysis: it can be misleading.

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    During its run from late 2008, there were 12 occasions where the Gold Bugs Index set higher highs, and only three times did we see a low take out a previous low. Since 2011, the Gold Bugs has only taken out a previous high once, and it was largely insignificant because the high was internal (a peak in between two larger peaks).

    (click to enlarge)

    The two trend lines have been steering towards what appears to be a logical convergence.

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    The air pocket and trend line set up a compelling argument that gold could continue its descent lower. The half way point of the air pocket (marked by the white horizontal dotted line) might be enough to set up a bullish reversal, if gold does actually fall that far.

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    Reversals start one tick at a time. If the Gold Bugs manages to use the support line as a trampoline and works its way above the two circled bars, I would consider it a small victory for gold stocks while watching the 264 and 275 areas for potential reversals. The Gold Bugs has to push its way through previous highs and take out a gap between 293.47 and 301. It's not an impossible scenario.

    This has hardly been a text book version of a dead cat bounce, however. The sideways activity followed by lower lows is a concern.

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: GLD
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