Sunday 16 February 2014
[Note: This started as a comparative look at some gold stocks, and
it turned into a great exercise in finding trades, if you take the time
and go through the steps we outline in each chart. You can begin to
see differences in the quality of trade selection, based purely on
information the market offers each and every day. Enjoy!]
We often see comments to the effect of interest in gold miner stocks
as a play on gold. Ten days ago, we did an analysis of silver-related
stocks, Taking Stock of Silver Stocks, looking at SLW, PAAS, CDE,
AG, SSRI, and HL. While many view mining companies as a proxy
for gold, they are not necessarily so. There are many influences that
can affect the performance of a mining stock that are unrelated to
the performance of the underlying physical: management, cost of
mining, depletion, labor issues, added debt, etc.
What we know about charts is that they do not lie and most
accurately depict conditions and character for each time frame and
for any given stock or futures activity. You can actually see how
markets develop into trading opportunities, as well as when to avoid
committing money. Charts capture the essence of timing so lacking
What is important to understand is that you do not need to be a
"technical analyst" to understand how to read a chart. Markets are
full of logic. One needs to exercise some patience and follow the
logic, as explained, and you will have a greater sense of what to
expect in any given situation and at any given point in time. When
things are not always clear, that, too, is a message from the market
to leave well enough alone, and look for other, clearer opportunities.
Is that not a worthwhile objective to manage risk and increase
You always want to look for a "story" where the developing market
activity is providing information on how, [long or short], and when
to enter, and at what price. There are a few stories in some of the
charts that may help you better understand.
As a point of clarification, we do not trade in any of these stocks. This is a hindsight analysis, if you will, using the same techniques we
apply in our Recommendations section. What each chart analysis
captures are the principles we employ and the rules used in
execution, based on developing market activity, or repeating
The kinds of patterns we identify appear over and over in the
markets. It then becomes a "simple" matter of searching for the
same pattern behavior moving forward. It is called having an "edge,"
the expectation of a favorable outcome based upon past history. As
in life, in the markets, history [patterns] repeats, not always exactly,
but the pattens rhyme very closely.
The current weekly and daily gold charts will be posted first, to use
as a reference relative to where the following gold stocks are as of
last week. They are from our gold article of a few days ago, Bankers
Can [Will] Steal Your Cash. The charts are presented in no
particular order, but the order in which they developed were
interesting in progression.
Weekly for reference:
Daily for reference:
We always start with weekly charts to identify the primary trend and
then be able to put the daily chart into a relative context. Higher
time frames are more controlling over lower time frames.
The sharp volume spikes were obvious, but we did not know what to make of them throughout a developing TR. [Trading Range]
An apparent potential breakout was developing at the beginning of
January. The chart comments explain the entry. You can see the
correction in late January held the initial breakout area very well,
and that augured for higher prices to come, and price did move
Last Friday was another breakout day to buy on the opening. We did
not draw lines to show the TR since the early January breakout, but
once you add them, you will see how the two breakouts were
similar, leaving a TR. Patterns repeat.
Breaking a TL, [Trend Line], is not that significant of an event. Of
greater importance are previous swing highs/lows and high volume,
wide range bars. The TL has been broken, but NGD has some
overhead resistance with which it must overcome. Compared to
ANV, NGD is a relatively stronger chart.
Whenever you have a choice of which stock to buy, always buy the
stronger performer. It has proven that from its relative strength, it
will likely perform better than others.
There is a breakout on the daily chart, from Friday, but when you
look at the weekly chart and see potential overhead resistance, the
upside may be limited.
You can also see how NGD labored in its initial January breakout,
relative to ANV.
What stands out on the weekly AUY is the gap lower when price
broke a previous support area from May '12. A horizontal line is
drawn from the low prior to the gap day. It will act as future
The next two rally attempts failed to close the gap area. This left a
space which is what is referred to as bearish spacing. It occurs when the next rally after a swing low fails to reach the swing low price.
What this tells you is that sellers were confident enough in expecting
lower prices that they did not need to see how the last swing low
would hold on a retest.
AUY has these issues and may not be the strongest buy candidate.
The daily chart may show something different.
The explanations for each chart is a way of explaining a "story"
behind each chart and its developing market activity. We just
qualified how the weekly AUY could have issues. The daily chart
presented a situation that provided a low risk entry with greater
potential profit in the trade shown below.
Here is the "story." When you see correction from the January high
to the early February low, it forms a downsloping pennant. If it looks
like price could breakout to the upside, there is a great trading
When you look at the February low, you see how it stopped at 1) the
January opening gap, and 2) the supportive TR that followed the gap.
The decline in February, stopping at an obvious support could lead to a rally. The bar after the February low rallied on increased volume,
which means increased buying. If price can rally higher next day, you can place a buy stop above the top pennant line and buy what should be a breakout.
Let us assume you placed a buy stop at 9.30 or 9.40. Price closed
strongly that day, and it continued to over $10, as of Friday.
Forgetting the potential for AUY to continue higher, what counts is
how you can use past market activity as a guide that helps present
a greater probability of market direction as events develop into a
defined pattern, as just described.
The initial protective sell stop would have been around 8.70. It could
now be moved to 9.70, providing a risk free trade. There was no
guesswork or need to "predict" anything. The market advertised the
situation as it developed, and you will see situations like this
FCX is in a TR, and compared to a few other companies below, you
can better understand why this would not be a good candidate for a
buy. Why not? You want to be buying those stocks that have already
proven strength by moving higher. FCX failed in two attempts
against proven supply, noted by the December '12 high volume, wide range bar lower.
S/D means Supply overcame Demand, and that price level will be
defended by those who sold in order to protect their profits. The two failed rallies in October and December '12 are a testament to that
pattern. Note the very small range of the last weekly bar in
December. The reason why it is so small is because sellers were
much stronger than the buyers, preventing buyers from staging any kind of rally. It is a point of resistance.
The rectangle shows the small range bar from the weekly chart. You
can see how volume was weak, a lack of demand, and sellers
stepped up and took control. We said of the weekly bar that it was
resistance. Look at the mid-January retest of that failed swing high.
Not only did price stop at that level, new aggressive selling entered
the market, noted by in sharp increase in volume, adding to that
price level as future resistance.
When you understand that past support, once broken, become future resistance, you can see why FCX stopped at 34, Friday. Volume
declined, again, indicating a lack of demand. That could change by Monday, but for now, until increased demand shows up, FCX is notthe best buy candidate.
Worth pointing out is the fact that there are people who are buying
these lesser performing stocks. Why? They are not reading the
charts, for one, and they do not understand the concept of relative strength, as you now do, and hopefully, you are beginning to make
better buy decisions.
We did mention there is a high degree of logic to be found in market activity, as shown in
The KISS principle at work.
After reviewing the previous charts, do you see any reason to buy NEM?
You will note that we are using only the stock symbols and not the names. Sometimes,stocks have greater name recognition. We do
not care. We are only interested in the stock's price recognition,
relative to others within the same category.
One should exercise a little more caution in new situations with little
price history, and AEX is included precisely for that reason. Brief as
its price history is, there is already a red flag bar at the rally high.
Volume increased, but price closed at the low of the range, letting
you know sellers were stronger than buyers.
See how the market is "giving" you specific information? Knowing
that, would you want to be a buyer of AEX?
The "story" comes from the weekly, just covered. With a poor close,
one can expect a sell off to occur, or at least the probability of a sell
off is much greater than a rally. You want to find those situations
which tell you that the "probability" of a directional market move
is greater in one direction than the other. this is what will give you
an edge in decision making.
For as negative as the weekly chart appears, there was actually a
low risk, greater reward probability situation that developed when
GDX stayed in a TR for the last half of January into early February.
Take a look and see if you can spot a few reasons why this was a
reasonable short-term buy candidate. You will get some answers in the next paragraph, but you want to learn to look for your own
TRs lead to breakouts. In the middle of January, there was a gap up
in price, just under 23. For the next six TDs, price moved sideways
and held the gap up, indicating support. From the end of January
though the first part of February, the bottoms of the day ranges
stayed above the support line.
Note how volume declined just prior to the upside breakout. The
declining volume told you that there was no selling pressure at the
February low. It was followed by a relatively strong rally and high-
end close bar, just under resistance at 24. A buy stop just above 24
made sense, just as a buy stop on the AUY daily chart was a strategic move. The risk was a stop just under 23!
Price gapped higher next day. A buy stop automatically put you in
the trade, and price rallied, as the probability of recent developing
market activity revealed.
Each situation is unique in how the future will unfold, something you
cannot know in advance. By trading relative strength stocks and
using recognized pattern situations that have a "story" behind them,
the probability of you trading/investing successfully have increased in your favor dramatically.
Now you are trading with an edge. There is no reason to ever do