At the time of my
most recent article, we had just
begun the stock market rally out of the July 2nd bottom and I
suggested the rally would be able to continue higher, which it did, until the
SP-500 1100 level stopped it on 3 consecutive days. Since then, we have
taken 45 points off the index and today began a successful rally from 1057
that ended the day at 1083.
I have little
doubt that the momentum generated today will soon yield another attempt to
crack through 1100. However, I am skeptical that we will be able to get
much higher than 1100 on this particular rally. Please, let me show you
why.
I use a momentum
indicator, the True Strength Index (TSI) to generate buy and sell
signals. One of the pre-cautionary techniques I employ is to anticipate
divergences between price movement and the indicator’s movement.
The following chart of both the VIX (Volatility Index) and SP-500 gives us a
confirmation today that a rally is newly underway. Namely, the TSI
indicator’s reading of the VIX has turned down and for the SP-500, it
has turned up.
What the chart
does not specifically tell you is that the SP-500, when it reaches 1100+ this
time, is highly unlikely to also reach a TSI reading greater than its
previous high of .62 This means that a new price higher than 1100 will
be accompanied with a lower high reading of the TSI, thus creating an
unfavorable divergence.
Likewise, the VIX
low TSI reading of -.55 is unlikely to be surpassed with this rally.
The next chess move, then, will be for the SP-500 to correct downwards after
surpassing 1100, then try to overtake the TSI high it makes in the initial
process of cracking 1100.
This next chart
is of the $TICK and, like so many indicators I have reviewed recently, it
shows us that we are not presently at one extreme reading (urgency to
buy) or the other (urgency to sell). If you peruse the chart from left
to right you will notice that as the tick drops, price drops. And as
the tick rises, price rises.
Our current
reading is near the $TICK indicator’s 200 dma, suggesting neutrality,
but a longer term view suggests the $TICK is likely to complete its current
pendulum swing (begun at SP-500 1010) by going to an extreme much higher
– carrying price with it.
Gold was a little
over $1210 when I last wrote to suggest it was going to have a difficult time
climbing much higher until it first corrected. Indeed, with this
morning’s low of $1175, gold has now corrected and looks poised to head
higher with a stumble or two along the way.
What follows is
the daily chart of GLD. I am using two indicators below price action -
the True Strength Index (TSI) and below that the Money Flow Index (MFI).
What I have been looking for from each indicator was a specific condition to
identify a potential bottom in gold price. With today’s action,
both indicators gave the green light buy sign.
First, I was
looking for the TSI to set up a positive divergence with price i.e. price
makes a lower low while the indicator makes a higher low. That
did happen with today’s positive action. The other thing I was
looking for was MFI to take out its previous high and that is now in place,
as well.
You will notice
that TSI divergences (lime green) have correctly identified several of
gold’s bottoms in the past. Also, the MFI technique I use (hot
pink) has also been very effective in identifying recent bottoms in gold.
I am very
concerned that today’s gold movement was not accompanied by high
volume. And I believe today’s intra-day $1175 low was completed
pre-market of opening trade in New York – so stock investors were
treated to a rising gold price at the start of trade and really were never
subjected to a plunge in price. Both these issues make me suspicious of
this bottom, though my indicators certainly look favorable.
For now, I think
the ZERO crossover that GLD needs to make on the TSI indicator is a critical
piece in the short term. Currently at TSI -.27, it is very possible for
gold to generally rally higher now, hit the ZERO level and get turned back
– possibly to new lows. For now, however, I see no reason why
gold has not indeed bottomed and is ready to rally higher. I will
reassess the ZERO crossover issue when we get there.
If you enjoy
technical analysis, maybe are curious to learn more about the True Strength
Index indicator and how to use it, or just like to be a part of discussion
about market and gold price direction, I invite you to visit my
website. www.theTSItrader.blogspot.com
I provide some useful data on 15 mining stocks with explosive projected
earnings, a study of the gold secular bull market beginning in 2001 with
charts, and heck, I even post my trading record. Or, you can drop me a
line at: tsiTrader@gmail.com
Good trading to you,
John Townsend
The
TSI Trader
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.
|