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Jeff Diercks
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Jeff Diercks, is an investapreneur and recovering CPA. He actively trades his own money and manages the assets of a select group of clients at InTrust Advisors, a Tampa, Florida based wealth management firm focused on trend following and price momentum strategies utilizing ETF securities. Mr.... More
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  • What Gives With Gold? 0 comments
    Aug 29, 2013 9:20 AM | about stocks: GLD

    Many of our subscribers seem to be wondering why we have not exited our short (inverse) gold position and moved to the long side. Well in today's post I hope to shed a little light both on how trend following models work and why we are still inverse (and giving up return) in this position.

    Let's first mention that Stock-Signal.com uses trend following to determine buy and sell signals on positions. As I mentioned in our last post entitled, Get Rid of Your Investment Worries Once and For All!, trend following is reactive, not predictive.

    So it would be expected that when a stock or commodity bounces, we might give back some return before we realize a definitive reversing buy or sell signal.

    Our models are also based on weekly charts, like the one below of the gold ETF, the SPDR Gold Trust Shares (Symbol GLD).

    (click to enlarge)

    Click to enlarge

    So let now dissect this chart and see what it tells us about gold and trend following:

    First, notice that the GLD candlesticks (red, black and white bars on the chart) essentially fell in a water fall pattern from April through early July of this year. Also notice both the eight period (orange line) and 37 period (orange dashed line)exponential moving averages. Notice how far apart they moved at the bottom of the GLD waterfall.

    Using moving averages, like these, is a basic trend following tool to determine buy and sell signals. We use moving averages on a number of indexes. On other indexes we use a combination of moving averages and indictors to confirm. Each of our indicator or moving average combinations is back-tested and optimized.

    So if you are with me so far, GLD bounced at 114.68 and reversed upward. See how long it is now taking the two moving averages to adjust because they were so far apart.

    As a basic premise of our service, we are always invested either long or inverse/short. Some trend followers might use a shorter term moving average as an exit signal (other than the 37 EMA), but the problem with that is this chart is far from a buy on this timeframe. So what do you do sit in cash or go long and hope your signal saves you if it reverses again? We prefer to have our longer-term signals to give us fewer, more significant signals to be either buying or selling….no in between to deal with or make decisions. It pretty much all works out performance wise in the end!

    Now notice on the GLD chart the two horizontal black dotted lines on the right of the chart! These are the next levels of minor resistance for GLD. We are up on the first now.

    Will either hold and reverse GLD? It is too early to tell, but they could.

    Alternatively, the yellow band of color is prior support turned into resistance. This certainly is a strong resistance zone for GLD and a likely last place where it could bounce and hit.

    Now I am not a betting man, I am pretty confident it does not break this level.

    So what could happen in the interim? Well our two moving averages are now moving up to meet each other. We could get a cross and a buy signal.

    We could also see the averages draw close and then price resume a downward track.

    If this is a bottom for GLD, you would usually see a retest of the lows. We have yet to see this retest, so my guess is this is just a bear market bounce for GLD and more downside is to come as counter intuitive as this may seem given all the money printing and deficit spending around the globe!

    I hope this helps. If you have comments or questions, please do so below.

    Themes: Gold Stocks: GLD
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