Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Market Charting Characteristics

Commodities / Gold and Silver 2010 Jun 21, 2010 - 01:43 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleEach commodity and each economic good has its own characteristics, and before you trade any market seriously, you should stick your toe in the water, so to speak, (meaning to trade at a level you can afford).  In this way, you can acquire knowledge of the characteristics of the particular market.

I do not recommend paper trading because any market has a way of grabbing hold of your emotions and making you do things which you would not do under the perfect conditions of an academic study (where there is no money at stake and no time pressure).  Most people in the markets are acting on their emotions, and if you want to take their money, then you must be in control of yours.  And the best way to learn to do that is to trade with your own money (but always an amount you can afford to lose).

Indeed, this experience in controlling your own emotions is so important that it applies to those around you (who are supposed to be on your side).  Very often a giant emotion will dominate a market.  This emotion becomes so strong and so universal that it is very hard to take a position against it.  But when I had gotten to the point where I had mastered this, I found that there was another trap.  I kept running into a series of mistakes on the part of the people around me because they had succumbed to the prevailing emotion and were not properly executing my orders.

Of the various technical theories on the markets, my criteria for deciding which ones to use is based on what works.  And I have found the best results with the chart patterns
 described in Technical Analysis of Stock Trends by Edwards and Magee.  These are simple, geometric patterns with forecasting implications.  When one of them appears, it is usually reliable but not perfectly.  (Edwards and Magee say they work 70% of the time.)  For this reason, I try to increase my probability of success by finding 2 corresponding patterns in goods known to move together.

For example, consider the ascending triangle which formed in gold from March ’08 to October ’09 and broke out thereafter.  Let us give this a 70% chance of hitting its price objective line (which is the line drawn parallel to the bottom line of the triangle and going through the upper left hand point).  The price objective line is rising very rapidly.  If gold hits it next spring, it will be at $3,300.  If it hits it in spring 2012, then the price will be between $4,500 and $5,000.  Since this number is very high, it has the quality of too-good-to-be-believed.

However, we are now getting another ascending triangle in the HUI.  The only difference is that the triangle in gold broke out last October while the triangle in the HUI looks ready to break out in a matter of weeks.  If it does, then we can compound probabilities as follows.  The probability of failure in gold is 30%.  The probability of failure in the HUI will also be 30%.  It is like the math problem of flipping a coin twice and asking what is the chance that you will lose both times.

Our chance of losing both times in the markets is (1 - .70) x (1 - .70) = .30 x .30 = .09.  Thus our chances of being wrong are only 9% instead of 30%.  If we can find another good chart pattern in a related good (say, silver), we could multiply our probability even more.  If silver breaks out of a corresponding triangle, then we have .30 x .30 x .30 = 2.7%.  That is, our chances of being wrong will be less than 3%.  And those are good odds to play.

All bullish chart formations must be confirmed by increased volume on the breakout.  Bearish formations do not need volume confirmation.  (Stocks need volume to rise, but they fall of their own weight.)

Almost all chart patterns have price objectives attached to them.  This tells you how far, at a minimum, the economic good will travel before reversing.  For a triangle, the price objective is not a point (as it is in most cases) but a line.  Before the chart reverses, it will reach the price objective line.  This means that the slower the chart moves the higher it will go.

Below we have a symmetrical triangle which formed over the middle part of 2009 and broke out in September.  Notice how gold reached the price objective line of this triangle in November, and this was an important clue for my call of an intermediate reaction in gold in early December.  A price objective or price objective line is always a minimum.  This means that the good has to at least reach this point.  When it does, there is usually an intermediate (or short term) reaction.  And then the good may continue up to a higher level.

Above we have a head and shoulders bottom in gold extending from December ’09 to late April ’10.  Its name comes from its shape, which is that of a man’s head and shoulders turned upside down.  (There is also a head and shoulders top, which is rightside up).  The line joining the two high points is the neckline, and the formation is complete when prices break above the neckline (a little above $1,160, in late April).  Notice that the $80 price break in gold of mid-May was a very nice return to this neckline (which has now become support).

To get the price objective on a head and shoulders bottom, we measure the distance from the bottom of the head to the neckline (on a semi-log chart).  The distance from the bottom of the head to the neckline is 10%.  Projecting a 10% rise from $1,162.  We then measure upward from the neckline at the point where the price action crosses above it (also $1,162).  This gives us an objective of $1,281.  If we use the electronic gold chart, which records trading overnight, the calculation is close to $1,300.  So this objective has not yet been reached.

Gold is a good chart commodity.  It forms chart patterns frequently, and they are reliable.  I mean to show by this study that good technical analysis is not too difficult for the average person.  Quality (recognizing the patterns and applying them correctly) is more important than quantity (knowing a large number of patters) for the reason that a few, simple patterns tend to repeat.  You must take some risks in trading, but if you stick out your neck too far, you will eventually get it chopped off.  So limit possible (worst case) losses to 3-6 months of income or 20% of capital.

As a teaser, I will leave you with a final chart pattern, which completed on Friday.  Try to identify it and see if you can calculate its price objective.  (Hint, you will need to print out the computer image on paper and complete work with pencil and ruler.)

If you are interested in my approach to gold, then I invite you to subscribe to the One-handed Economist, my fortnightly financial letter, which follows the markets and makes recommendations for maximum profit with safety.  OHE is written every other Friday with special bulletins when something important occurs.  For regular mail customers, It is mailed on Saturday/Sunday.  For e-mail customers, the letter is posted on my website, (password protected).  Also included is my model conservative portfolio which, at the present time consists of three gold stocks and two gold futures contracts.  The model portfolio started at the beginning of the century at $100,000 and just this week reached the $200,000 mark. 

Meanwhile, the average US general equity fund is flat for the same period.  I have been bullish on gold since December 2002 and have been an active gold bug since 2005.  You can subscribe by visiting my web site, and clicking the Pay Pal button.  Or you can subscribe by sending a check for $290 through the U.S. mail ($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  Thank you for your interest.
# # #

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in