I was chatting
on the phone earlier this weekend with one of my readers about the shocking
drop in the price of gold earlier this past week. We agreed that
the mini-crash seemed to be the result of a well coordinated effort by some
powerful bullion banks who, incidentally, are
notorious for shorting gold.
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Honestly,
neither of us saw the Tuesday bear raid coming and our mining positions were
flooded in a sea of red for the rest of the week. Perhaps yours were as
well.
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With
noticeable disdain for the alleged perpetrators, my friend commented that it
is really too bad this kind of manipulation is allowed to take place in the
free markets, as lots of small investors are literally blind
sided and ripped off when "da boyz" decide to "take down" the market.
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And
he particularly lamented that there was simply no way to know when
they would strike.
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This
last comment struck me as interesting as I suspected this was not
necessarily true. We decided to look at the gold continuous
futures contract and see what the True Strength Index (TSI) indicator
could tell us.
I was not too
surprised with what we found but my friend was rather stunned
- particularly after I explained what the chart said.
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If
you would like to learn how to anticipate future bear attacks, I encourage
you to continue reading as I am going to show you an exquisite recipe for
preparing a price disaster.
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Successful
bear raids are no accident. They are carefully executed when the
market's underlying momentum is prepared to a degree of extreme
vulnerability. I hope my effort to explain the following will shed new
light for you on the True Strength Index indicator techniques available to you
for the anticipation of these powerful
selling phenomenon.
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Let's
begin with a quick look at this first 4 hour chart of the Gold
continuous chart contract (/GC) for the action of the past week.
I have simply added my usual True Strength Index setting of (7,4) below price, and highlighted the price disaster that
began on Tuesday with a red rectangle. I made this chart using the software
available at ThinkorSwim.
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I
have permanently placed a page on my website that details the 6 Buy/Sell techniques using the True Strength Index (TSI) indicator that
you may reference whenever desired. On the sell side, one of the
techniques is the recognition of a negative divergence.
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A
negative divergence occurs when price continues to make a higher high, while
momentum (TSI indicator) diverges by making a lower
high. Normally, a negative divergence will cause price to correct
downward. In effect, price has moved higher without a correspondingly
stronger measurement in the TSI momentum indicator, and will need to be
corrected.
Our second
chart shows that indeed price corrected immediately after the first negative
divergence. But incredibly, price then continued to make a new high and
a second negative divergence. This alone is fairly unusual - two
negative divergences in a row. Price should have certainly gone into a
corrective phase but instead, price went higher yet and made a third consecutive
negative divergence.
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At
this point, price disaster was virtually assured. Whether "da boyz" get the credit
for pushing price up like this when it should have been correcting, I have no
idea. But once the heavy selling started it was clear that there would
be a vicious outcome.
A couple of the
other Sell techniques of the TSI indicator are the trend line break (green
line) and the ZERO crossover (hot pink circle).
As seen in this third chart, the TSI faithfully sounded these sirens
immediately for all who knew how to listen and who were watching the chart at
the right time - SELL!
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Unfortunately
for me, I was not watching this chart at the right time and my positions were
clobbered.
But I was
keenly tuned in to see when the "all clear" siren would be sounded
and though it took a few days, I knew it when I saw it.
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Early
Friday morning a couple of the bullish TSI Buy signals appeared to signal the
end of the bear raid. As seen on this fourth chart, a bullish positive
divergence (orange line) was created when the TSI failed to make a lower low
as price made a lower low, and secondly, as price began to rise a bullish
trend line break (light blue line) occurred. And once again, the True
Strength Index indicator absolutely nailed the bottom of this painful
sell-off and gave the Buy signals at the most opportune time.
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To
put it all together, negative divergences between rising price and the
underlying TSI indicator call for a downward direction in price. More
so after two consecutive negative divergences. And most urgently
following three.
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Trend
line breaks of the TSI indicator are sell signals when the indicator is
falling and buy signals when rising. The Zero line crossover is bullish
when reached from below zero and bearish when the crossed from above.
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I
hope this article will help you in your future trading decisions.
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Wishing
you a profitable week,
John Townsend
John Townsend invites you to visit his website at www.theTSItrader.blogspot.com. He usually offer a few posts each day on
his market observations, often comment on the particular stocks he is
currently trading, and tries to show ways to use the True Strength Index
indicator to make some sense of where the precious metals and their miners
are heading. Please do not hesitate to contact him.
