Seeking Alpha

JohnTownsend's  Instablog

JohnTownsend
14 Followers
0 Following
Send Message
John Townsend has been an "on-again off-again" stock market investor/trader for the past 35 years. He has particular fascination with all sorts of indicators and has spent countless hours pondering technical analysis in general. John's passion for gold, miners, and analysis is a... More
My company:
The TSI Trader
My blog:
The TSI Trader
View JohnTownsend's Instablogs on:
  • SP-500, GLD and GDX - Sentiment Trumps Everything
     July 25, 2010

    Markets rise when the preponderance of participants are buyers, and fall when the preponderance of participants are sellers.  One of the key ways to anticipate the pendulum swings of participant behavior, and therefore price behavior, is to evaluate sentiment.  Sentiment, more than fundamentals or technical analysis, trumps everything.
     
    When too many players are on the same side of a trade they eventually find themselves in a crowded position where most everyone around them has the same motivation – to reverse their position when the tide changes.
      
    Little by little, as participants slip out the back door by changing the bias of their position, the pendulum of price swings more sharply against the remaining herd in the crowded trade.  Inevitably, something akin to panic sets into the herd as they begin to aggressively reverse their position for financial survival.  The primary ingredient that causes price to catapult, up or down, is sentiment oscillation and capitalization from one sentiment extreme to the other.
     
    An astute market technician, investor or trader will look for those flash points where conditions are ripe for a market reversal.  It sounds easy to do, but remember that when the analysis is very convincing, the preponderance of market participants will disagree.  It seems that to be effective at market timing one needs to listen not to what others are saying, but to what the sentiment data represents as truth.
     
    With these thoughts as a foreword, let’s see what the current sentiment situation is for the SP-500.
     
    The following chart is from Market-Harmonics and assimilates 4 years of bull/bear percentage data from Investor’s Intelligence.  To this chart I have measured and notated in blue the percent change in bearish advisors per the Investor’s Intelligence data, for each downswing of the SP-500.  My notation in green is the percentage change in bearish advisors for the related upswing of the SP-500.  The price of the SP-500 is notated in black at each swing peak and trough.
     
    One of the most striking observations I have made of this data is that it appears the maximum pendulum swing in the bearish direction is a 20% change.  This occurred in Q1, 2008.  More frequently this percentage change has topped out at 19%, followed by 16%, 11% and smaller percentage changes.
       
    The obvious conclusion I come to is that our current bearish % change situation, at a 19% reading, is about at the maximum.  History seems to show that investor’s emotions, like a physical rubber band, can only be stretched so far into pessimism (19-20%) - the bearish direction - before they snap back in the opposite bullish direction
    .  
    The pendulum swing in the bullish direction is about to begin at this very time.

    I would expect that the stock market could not possibly peak until the % of bears decrease by a minimum of 8%, and more statistically likely 10-15%.  With a current reading of 36%, I am suggesting that we should not even consider a peak in the stock market until the bear percentage reading drops from where it is now at 36% to 28%, and more likely to around 26-21%.
      
    What this means for now is that 1100 is not the top in the SP-500.  Far from it.  The bears have not even begun to turn into bulls.  Price will go much higher from here and it will take weeks, if not a couple of months, minimum, to reach a shift where the % of bears are themselves finally out of whack on the teeter-totter.
     
    Gold, while not covered by Investor’s Intelligence to my knowledge, would appear to be in a similar setup as the stock market.  For this I turn to data published this past week at Schaeffer’s Investment Research and look at the 2 year history of the GLD put/call option ratio.
     
    When the put/call ratio spikes high, it means that traders/investors are convinced that the price of gold will fall.  I have circled on the chart such instances from the past two years in red.
      
    What we can observe is that when the bearish trade gets excessively crowded, when a preponderance of participants are convinced that gold will fall, that is not the top in gold.  Rather, it is the bottom.  I have circled with green the price of gold for each occasion of a put/call ratio spike.
     
    Again, think about what is going on here.  When the put/call ratio spikes upward you have an intense perception and emotionally dramatic conviction of traders that substantially puts too many folks on the same side of the trade.  When gold starts to move against them, even just a little out of their expectation range, each owner of a put option is no longer a seller of gold, but becomes a motivated buyer of gold!  This is precisely how huge brisk run ups in price are both setup and then executed.

    If I were presently short gold and looked at this chart it would send shivers down my spine.  No kidding.  Nothing like finding out you are in a crowded trade that once it starts to go bad, you KNOW it will go very bad.
     
    Now, I am not saying that the bottom for gold is in just yet.  Gold could still delight the bears and frustrate the bulls with one last brief maneuver lower this week.  But after that, if it happens, I believe gold’s low will most definitely be in and then there will be a lot of folks who will wish they did not hold puts on gold.
     
    While gold has not yet told us if the last shoe has dropped, the GDX miner ETF, however, is suggesting a favorable outcome.  The following daily chart is the GDX and below its price movement is the True Strength Index Indicator (TSI) with volume.  You can make you own chart and use the TSI indicator by visiting FreeStockCharts.
     
    On the negative side for GDX, the True Strength Index indicator reading is still barely below ZERO in negative territory (-0.06).  On the positive side, GDX is sporting a positive divergence between price and the indicator, a recapture of the uptrend line begun last February, a breakout of a 4 week price downtrend line and a breakout of the TSI indicator on increasing positive volume.  All in all, I regard this setup as bullish for GDX and most likely for GLD, as well.

    If you are interested in reading more about the techniques of using the True Strength Index (TSI) indicator, want to be exposed to discussion and analysis of various mining stocks, as well as the US Dollar and stock markets, or just want to participate in a blog where your thoughts are heard and responded to, I invite you to join me at my website which is:  The TSI Trader.  Or jot me an email, tsiTrader@gmail.com
     


    Disclosure: NONE
    Tags: GLD, GDX, SPY, Market-Harmonics, Investor's Intelligence, FreeStockCharts, The TSI Trader
    Jul 25 8:49 AM | Link | Comment!
  • Time to Rally: SP-500 and GLD
     July 21, 2010

    At the time of my most recent article, we had just begun the stock market rally out of the July 2nd bottom and I suggested the rally would be able to continue higher, which it did, until the SP-500 1100 level stopped it on 3 consecutive days.  Since then, we have taken 45 points off the index and today began a successful rally from 1057 that ended the day at 1083.
     
    I have little doubt that the momentum generated today will soon yield another attempt to crack through 1100.  However, I am skeptical that we will be able to get much higher than 1100 on this particular rally.  Please, let me show you why.
     
    I use a momentum indicator, the True Strength Index (TSI) to generate buy and sell signals.  One of the pre-cautionary techniques I employ is to anticipate divergences between price movement and the indicator’s movement.  The following chart of both the VIX (Volatility Index) and SP-500 gives us a confirmation today that a rally is newly underway.  Namely, the TSI indicator’s reading of the VIX has turned down and for the SP-500, it has turned up.
     
    What the chart does not specifically tell you is that the SP-500, when it reaches 1100+ this time, is highly unlikely to also reach a TSI reading greater than its previous high of .62  This means that a new price higher than 1100 will be accompanied with a lower high reading of the TSI, thus creating an unfavorable divergence.
      
    Likewise, the VIX low TSI reading of -.55 is unlikely to be surpassed with this rally.  The next chess move, then, will be for the SP-500 to correct downwards after surpassing 1100, then try to overtake the TSI high it makes in the initial process of cracking 1100.

    This next chart is of the $TICK and, like so many indicators I have reviewed recently, it shows us that we are not presently at one extreme reading (urgency to buy) or the other (urgency to sell).  If you peruse the chart from left to right you will notice that as the tick drops, price drops.  And as the tick rises, price rises.
      
    Our current reading is near the $TICK indicator’s 200 dma, suggesting neutrality, but a longer term view suggests the $TICK is likely to complete its current pendulum swing (begun at SP-500 1010) by going to an extreme much higher – carrying price with it.

    Gold was a little over $1210 when I last wrote to suggest it was going to have a difficult time climbing much higher until it first corrected.  Indeed, with this morning’s low of $1175, gold has now corrected and looks poised to head higher with a stumble or two along the way.
     
    What follows is the daily chart of GLD.  I am using two indicators below price action - the True Strength Index (TSI) and below that the Money Flow Index (MFI).  What I have been looking for from each indicator was a specific condition to identify a potential bottom in gold price.  With today’s action, both indicators gave the green light buy sign.
     
    First, I was looking for the TSI to set up a positive divergence with price i.e. price makes a lower low while the indicator makes a higher low.  That did happen with today’s positive action.  The other thing I was looking for was MFI to take out its previous high and that is now in place, as well.
     
    You will notice that TSI divergences (lime green) have correctly identified several of gold’s bottoms in the past.  Also, the MFI technique I use (hot pink) has also been very effective in identifying recent bottoms in gold.

    I am very concerned that today’s gold movement was not accompanied by high volume.  And I believe today’s intra-day $1175 low was completed pre-market of opening trade in New York – so stock investors were treated to a rising gold price at the start of trade and really were never subjected to a plunge in price.  Both these issues make me suspicious of this bottom, though my indicators certainly look favorable.
     
    For now, I think the ZERO crossover that GLD needs to make on the TSI indicator is a critical piece in the short term.  Currently at TSI -.27, it is very possible for gold to generally rally higher now, hit the ZERO level and get turned back – possibly to new lows.  For now, however, I see no reason why gold has not indeed bottomed and is ready to rally higher.  I will reassess the ZERO crossover issue when we get there.
     
    If you enjoy technical analysis, maybe are curious to learn more about the True Strength Index indicator and how to use it, or just like to be a part of discussion about market and gold price direction, I invite you to visit my website.   www.theTSItrader.blogspot.com  I provide some useful data on 15 mining stocks with explosive projected earnings, a study of the gold secular bull market beginning in 2001 with charts, and heck, I even post my trading record.  Or, you can drop me a line at:  tsiTrader@gmail.com
     
    Good trading to you,
     
    John Townsend


    Disclosure: No positions
    Tags: GLD
    Jul 25 7:10 AM | Link | Comment!
  • SP-500, GLD and GDX - Down More or Now Up?
    Its mid afternoon Tuesday and the markets are selling off – still.  It seems like it will never end.  Big red candles on every chart I look.  The VIX, the temperature gauge of fear, is rising again and the news headlines are filled with gut wrenching uncertainties about US Municipals, foreign countries that are characterized as ticking time bombs and opinion that we are headed for another Great Depression.
     
    With that backdrop, how about we ponder some charts and see if this market correction is likely to stay with us for infinity and beyond or if perhaps it has not only worn out its welcome, but is also close to having its flame extinguished.
     
    Let’s begin with the SP-500 hourly chart.  I made this chart online at the website www.FreeStockCharts.com.  The indicator displayed below price is the True Strength Index, commonly referred to as the TSI.  It is an elegantly smooth and responsive momentum indicator.
     
    First off, we’ll note that both the SP-500 and the TSI indicator have a trend line of lower highs connected by a white line.  The TSI trend line spans the entire 11 days of the SP-500 correction from 1131 to this moment.

    The exact midpoint of this SP-500 down leg is around 1,071 where we conveniently find an open gap that is begging to be filled.  Price today rallied up to the white trend line and has since been repelled lower.  It would be easy to conclude, at this moment, that the stock market will continue to fall apart except that the True Strength Index indicator is suggesting something quite different.
     
    The white trend line of the TSI has already given a BUY signal – as it was broken to the upside when price was just 1,017.  Since early Friday, the indicator of momentum has continued to rise and actually reached the ZERO level before being turned down an hour or two ago.
      
    When the TSI indicator is rising ABOVE zero, price will absolutely be rising simultaneously.  That is how the indicator was designed to work.  As we are now very close to crossing the ZERO level, I take that as a bullish sign.
     
    The other thing the True Strength Index is showing us is a favorable divergence.  The indicator is making higher lows while the SP-500 price is flat.  This indicates that a critical shift in momentum has occurred or is about to occur.
     
    Next, let’s look at GLD and see if we can figure out if it is likely to continue falling. This is a 30 minute chart of GLD.
    We notice that price is currently behaving in a manner curiously similar to a multi-day patch of time beginning 8 sessions ago.  There appear to be two prior instances when a divergence of GLD price with respect to the True Strength Index indicator preceded a run up in price.  Perhaps the current divergence in place signals a bottom, as before.  The trend line of the TSI has not yet broken out to the upside, so the jury is still out on how this will be resolved.  But the clues look very favorable for GLD having bottomed today.

    If gold is about to bottom, or has already bottomed, one would think the miners would somehow confirm that possibility – so let’s now take a look at GDX to see what we can find.

    I made this chart online at www.stockcharts.com.  On first blush, I saw those big red candles and it was difficult to emotionally get excited about what I saw.   Then I thought it curious that the lows across the chart seemed rather repetitive…..like maybe they were cycles, or something.

    At StockCharts.com you can select ‘Annotate – Flash or Java’ and then be able to use some interesting measurement and drawing tools on the chart.  I selected a tool that displays on the screen with vertical lines and you pull the indicator left and right across the screen to make the lines more or less frequent and therefore, closer or further apart.  Each line is equidistant from the other – and looks like a series of blue parallel lines.

    The application for this tool, of course, is to explore whether a price chart displays cyclical characteristics.

    I pulled the tool across the GDX chart, creating blue parallel lines equidistant one from the other, and nearly could not believe my eyes.   Plain as day, there were the cycles of GDX.  Sometimes a cycle bottoms a few days early, sometimes a few days late.  But after the cycle bottomed price always exploded higher.  Could it be that our recent horrible red candles are occurring right on schedule and about to turn into white candles exploding higher and higher?
     
    I invite you to visit my website at www.theTSItrader.blogspot.com.  I usually offer a few posts each day on my market observations, often comment on the particular stocks I am currently trading, and try to show ways to use the True Strength Index indicator to make some sense of where the precious metals and their miners are heading.  You may comment at my blog or contact me at:  TSItrader@gmail.com
     
    Thank you for reading my thoughts.  I look forward to reading some of yours.
     
    John Townsend
     
    Website:  The TSI Trader

     
    Tags: SPY, GLD, GDX, FreeStockCharts
    Jul 07 6:15 PM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments


Most Commented
Posts by Themes
$tick, $trin, ABCD pattern, Bollinger Band Crash Trade, C wave, FreeStockCharts, index indicators, Investor's Intelligence, Market-Harmonics, mining stocks, parabola, Secular Bull, The TSI Trader, theTSItrader, True Strength Index, True Strength Index indicator (TSI) The TSI Trader
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.