[Trading] Technical Analysis Journal

Long time no talk fellas, just a quick update as this trade has basically concluded. Since the time of this post I have started trading commodity futures instead of messing around with the ETFs, but we can still stick with the prices that I originally measured for the ETFs here.

On Monday this week the GLD topped out at $153.61 before reversing since then. That is just above our targeted range of 140-150, which means a prolonged period of consolidation is most likely headed our way. In other words, if you read up on this thread when it was first posted, or the several updates that came afterwards, it is now time to take your money off the table when it comes to gold. At least until a better entry presents itself. Another clue to an intermediate term top is the relative weakness in silver now, after a near parabolic run-up.

With that said, for longer term investors I still believe the trend is up for Gold, and may still have a few legs before it is all said and done. In my time as a trader, I have seen a few bubbles play out, just in the past 10 or so years. With a trend as strong as Gold is in right now, I believe that is where it is eventually headed. A real bubble, not the Gold bubble cnbc talking heads clamor about now on tv. I believe the macro cycle of money flowing from paper assets to tangible assets is still mid-way, with inflation and interest rates just on the rise. This will all culminate in a real boom-bust cycle for Gold. Lines in front of ATMs that sell bullion. The talk of cocktail parties of average joes. The full nine. Until that plays out, for longer term investors I believe it is still time to be opportune and accumulate on pullbacks- like the one that is about to go down. As for traders, this one is now either a short or put it on the back burner until the charts line up again.

 

I could use a history degree. Been looking at a lot of charts of both the stock market and commodity prices in the '70s. If it's any consolation, none of my friends who have business or econ degrees know a lick about trading. Personally I am thinking about going back to school if I have time for maybe a psych or sociology degree. Would do you more good than the "standard" stuff taught about the subject, which mostly turn out to be BS.

 

Not much else to do with the hurricane in town, at least for me, so let's talk trading.

I am going to go through the entire thinking process of a trade I am in currently, so remember, it is not about "picks" or "tips", but the process itself, whether in the end the trade works out or not. For a overview of my process:

http://bbs.clutchfans.net/showpost.php?p=5620589&postcount=19

I intended to elaborate on each bullet point, but unfortunately never got past the first one. In any case, here is an example of putting the process to work.

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The stock I am interested in is HL, a silver miner. First let's get into the background of this trade.

Throughout this thread, I make it pretty clear that I am bullish on gold and precious metals in general, for the long run. However, as traders, the commodity's vertical rise of late leaves little room for entry. The key to a good trade setup is risk/reward. Yet no matter how bullish I am of the metal, it is hard to risk minimally when the chart is a straight line up. Any entry at this level is high risk, which is why I have suggested in other threads to simply hold for long term investors, as opposed to initiating new positions.

The miners on the other hand have underperformed significantly compared to the metal in the past 10 months. Some would call that "undervalued". 99% of the time, I would vehemently disagree. To me, "undervalued" and "overvalued" from a fundamental perspective simply does not exist in the mass majority of cases. The only time it comes into play is when the market is crashing- forced liquidation, or when we are in a parabolic rise- bubble. In all other cases, assets are priced exactly where they should be, no matter what the fundamentals say- the point of a free market.

So now that we have gone entirely off topic, let's get back on track. Miners have been relatively weak, which historically I would avoid. The difference here is I believe gold is entering, or has already entered bubble territory. That should not set off alarm bells, but rather... whatever is the opposite of alarm bells, happy bells, I don't know. Bubbles are hugely profitable, as was the case for the internet, housing etc, as long as you know when to get out. I do believe that that time has not yet come in our case here. However, as a bubble matures, the individual investors will start to pile on, the average Joes. That is the fuel for its final meteoric rise, and subsequent pop. This is where the miners come into play. The fact is, for the mass majority of individual investors, they will not be investing in physical metal. Whether that is because of financial limitation, ignorance, or maybe it is simply unavailable to them. This is why I believe for the final phase of the precious metal bubble, miners will be the focus. Any individual investor can easily get exposure to the equity names, and they are probably the first things that come to mind for them, as opposed to the physical metal.

For investors reading this, that is really all that needs to be said, start getting bullish on the gold stocks that have been lagging. However, for traders, the point of this post and thread, that is only the beginning. For traders, at least for myself, it is all about leverage. Direction is useless if I don't know how much I have to risk. It is all about when/where exactly to get in to risk the least, so I can get in the most. Like we have mentioned, the metal might not have a good risk/reward entry, but some stocks are setting up very nicely. Which is where HL comes in.



Ok, a lot of information to process on this chart.

First, it is a weekly chart of HL. Just from the naked eye, we can see that it has been consolidating its strong up move since the beginning of 2011.

In June 2011, we had many factors in our process lined up:

1. Condition- For the first time since July 2010, both the Bollinger bands and Stochastics measured oversold, with the combination being our definition of oversold in our process.

2. Levels/Price- First, I circled the congested top of late 2009. That pivot, around 6-7, became an area of support once it was broken in November 2010. Second, on the Fib retracement of the Feb-Dec 2010 up leg, 61.8%, the most crucial retracement level, is right around 7.

Although we did have a bounce from this area, we broke through those lows recently this month as the market crashed. However, that has only served to setup an even stronger bullish signal. In early August, we bottomed exactly at the bottom Bollinger bands, which also coincided exactly with the 200 week moving average(red line). We immediately crossed back above that previous key support area of 7 within the week. We call this a bullish crossover, when we break a key support/resistance, but then immediately reverse. Like a crossover in basketball, what it represents is a fakeout, all the people who just thought the key support has been broken, just got shook.

3. Divergence- What makes the August low an even more powerful bullish indicator is the positive divergence that it created on the Stochastics. As you can see, even as the price of HL made a lower low in early August, the Stochastics on the bottom of the chart made a higher low. Divergences are some of the most powerful signals, especially when they line up with everything else.

4. Spectral analysis- As many commodities traders know, September is a historically strong seasonal period for precious metals.



That could not be clearer for HL, as September has represented the time period that it has broken out in both its previous two up moves. Meanwhile, January has been where it has turned weak.

With all of these factors in mind, I have been accumulating HL this past week in the low to mid 7s. Based on some extensions I have measured, I have a target of 15-20 in January, with a stop loss spread out around mid to high 6s.

That's it guys. Good way to spend part of a rainy day. Good luck in your trading.

 

I believe I updated what I did with that trade somewhere in this thread. I did not stay long with it as it whipped around during earnings, though I did end up green on the trade.

For investors it is okay to blindly stay in something for 2 years without a stop loss, hoping for it to triple. This is because as long as you are well diversified, you can usually ride out the swings, as long as you are right. If you are wrong on the other hand, and end up -50% after 2 years, tough luck I guess. Again, if you are well diversified, it is still no big deal.

The difference between what I do is my goal is not saving up for retirement. I do this for a living, and to do so I have to play with leverage. With leverage I am never truly diversified, and I must quantify my risk in every trade before I even initiate it. I cannot afford -50% in a position over 2 years, not only because I won't be able to eat in the meantime, I would also be blown out. The downside to this is it is impossible for me to always be right, and there will be instances where I get shaken out of a good trade. The upside is, during the past 2 years there has been plenty of other entries in RGR with much better risk/reward which I am able to take advantage of.

So to answer your question, I would not have been better off, since to hold it comfortably the entire time, I would have had to cut my size down to <1% of my buying power, meanwhile with a quantified strategy going in, I am able to utilize 10x, 20x as much. While I certainly am not making a 300% return this way, the absolute return is much larger, and I sleep easier at night as well.

 

Stopped out. Had a few other miners too, but they've been acting better than HL so took a smaller hit on those. These were more of a hedge for my short and reshort of everything else from ~1220 SPX though.