August 7, 2013

Logical Market Update: Day Two – Bulls Attempt to Stage a Comeback

Day Two and the Bulls Attempt to Stage a Comeback – Gold Stocks Back on the Radar – Time to Begin Buying?

The markets followed through on Tuesday’s selling finishing what I’m considering the initial (first) leg down.  Interestingly though, when the bulls moved in to stage their comeback, the volatility indexes were first on the firing line.  By the close a decent bounce higher was in place.  I’m not so sure the markets are convinced though that the drop off of recent highs was just an apparition, with the bulk of the closing madness being on the sell side.  The initial leg down remains in progress and while there may be additional buying tomorrow with the potential for an up day not off the table.  Even the last minute marking battle favored the bears leaving the bulls to push the futures and ETFs after the close.  What a joy it is to know that the exchanges still have a soft spot for their larger players giving them an extra 15 minutes to hedge – yeah right!  Current parameters remain valid for the broader indexes.  Tesla, Green Mountain Coffee Roasters, and Groupon reported earnings after the close.  TSLA jumped $18, GMCR fell $6 and GPRN popped up $2.50.  The saying “Only the Good Die Young” is somehow now more believable.   


Bonds put in a solid rally today and managed to hold it through most of the day’s gyrations in the equity and forex markets.  Expectations remain in place for a continued recovery rally to unfold before the next leg down takes over.  Again, any clues to direction will likely begin in the 10-year note.  The Dollar got caught between a rock and hard place as the British Pound was pounded into submission after comments from the Bank of England.  The rally in the Euro was again contained to the first hour of U.S. trade with most of the action being within the European sessions.  Most of the U.S. trade was held to a slightly expanded range of 20 ticks. 



Gold and gold stocks are back on my active radar after the latest bashing brought the gold stocks to gold ratio to a long-term low, further bashing would likely lead to this ratio testing the 2001 lows.  The damage is deep across the board.  Since January 2013 gold has dropped from $1700 to $1180 and gold stocks have fallen more than 50% and that would be amongst what are considered to be the titans within the mining sectors.  Weaker companies were cut off at the knees loosing up to 75%. 


The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index is a modified equal dollar weighted index.  The component companies are involved in gold mining.  HUI is one of the most watched indices and retains titan status next to the XAU index.  The unhedged part of the index name is the basis for the index.  Its component companies do not hedge their gold production beyond 1.5 years.  The table below lists the current company components and their weighting.   


Component Companies (HUI)    
Company name Symbol Weighting 
Goldcorp Inc NYSE: GG


Barrick Gold NYSE: ABX


Newmont Mining NYSE: NEM


Harmony Gold Mining Adr NYSE: HMY


Coeur d’Alene Mines NYSE: CDE


Yamana Gold NYSE: AUY


Anglogold Ashanti Ltd Ads NYSE: AU


Gold Fields Ltd Adr NYSE: GFI


Randgold Resources Ads NASDAQ: GOLD


Iamgoldcorp NYSE: IAG


Eldorado Gold Corp NYSE: EGO


Hecla Mining NYSE: HL


Comp de Minas Buenaventura Ads NYSE: BVN


New Gold Inc NYSE MKT: NGD


Kinross Gold NYSE: KGC


Agnico Eagle Mines NYSE: AEM












The HUI Index has been hammered, as the component companies have been sold in step with the decline in physical gold.  Off of the September 2012 high the HUI has dropped 323 points (60%).   Currently 2013 has not seen any favoritism towards the HUI.  But that may be about ready to change.


The weekly chart below details the decline beginning off of the September 2011 highs.  The pattern in place, which encompasses the rally off of the 206.66 June 2013 low to the July high at 263, took a lot of momentum to achieve less than 60 points.  The sharp decline in the last two weeks may be the beginning of an exhaustion decline, which could set the stage for a more sustained and dynamic rally.  The stochastic oscillator has again slipped into oversold readings, but has not shown any signs of turning yet.  Currently the HUI is likely to drop to a new low under 206.66 before the next sustained rally phase takes over. 


An additional important measure of value for gold stocks is the HUI – gold ratio.  The HUI-gold ratio is an expression, which compares the HUI index to the price of gold.  The ratio is calculated by dividing the value of the HUI Index by the price of gold.  Yes, it really is that simple – and here’s the kicker – when this ratio is very high, it correlates to gold stocks being expensive in relationship to gold.  Conversely when the ratio is very low, it correlates to gold stocks being relatively cheap relative to the price of gold.  The HUI-gold ratio bottomed in 2001 reaching a top in 2004. Progressively deeper major lows have occurred in late 2005, late 2008 and June 2013 as the bear market likely moves into its final stages.


Bollinger Bandsmeasure the “high” or “low” of the price relative to previous trades and are considered a volatility indicator.  Therefore by definition prices are high at the upper band and low at the lower band.  This definition can help in pattern recognition and when combined with additional indicators help to arrive at decisions as to direction or trend. 


The chart below keeps in perspective just how far the HUI has dropped and is likely in the finishing stages before a trend change takes place. 


It is time to move Gold, the HUI Index, and gold stocks back on the radar.  Opportunities are already presenting themselves and traders that already trade gold via one of the DTS “birds” should find solid profitable opportunities as the bear market finishes and the bull takes the reins.  I will be adding to our list below as this sector jumps back. 



Indicator Warehouse


Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.


The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.  


Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 


A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester When implemented it allows the user to:

  • Immediately know the impact of parameter changes. 
  • Automatically reads all of your DTS entries and exits
  • Calculates the profit/loss of each trade
  • Performs a wide number of essential intelligence boosting calculations instantly
  • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators


The last two points above are valuable tools to use.  It will show you where some “tweaking” is needed to improve results through the back testing feature. 


My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames.  As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.”    Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System.  Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms.  Our goal remains to assist traders to make greater profits during all types of markets.  Sector and money rotation is another tool.


The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    In the near future I will be adding options strategies to the trading list. 


Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals.  Continue to bear in mind that there are days when trading opportunities are not as plentiful.  These are days when not trading is likely more profitable than attempting to “force” a trade”:


  • DJIA future (e-mini available) – highly recommended for experienced traders
  • S&P-500 future (e-mini available) – highly recommended large intraday moves.
  • Russell 2000 future (e-mini available) – highly recommended can lead in either direction.
  • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
  • US$/Euro futures (e-mini available) – very highly recommended – easy to trade afterhours as well.
  • V (Visa) – stock and options – recommended – large swings in both direction likely
  • MA (MasterCard) stock and options – recommended – $600 stock – large swings likely
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – highly recommended – Options trading as well
  • GOOG (Google) – highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended 
  • 30-yr Treasury Bond future – highly recommended
  • 10-yr Treasury Note future – solid two way trade
  • TLT (Treasury Bond Long ETF) – very active
  • TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
  • Gold (futures and ETF – GLD) very active – not suitable for all traders
  • Silver (futures and ETF – SLV) – very active – not suitable for all traders
  • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes