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Technical
analysis is replete with analytic tools, techniques and systems all designed
to provide insight into the future price movement for a traded security. The technician
relies on price and volume history to predict future outcomes. Can looking at
the past be a reliable guide to divining the future? Can anyone drive a car
by looking only at the review mirror? Amazingly, in trading securities, the
answer is yes.
This is
because the markets for stocks, bonds, commodities and virtually any traded
good is driven by human behavior. In the search for profit, buyers and
sellers act in their own self interest. The buyer
always buys at a discount to his perception of the security’s value.
Likewise, the seller always sells when he perceives value is realized, or his
capital is better used elsewhere. When a transaction occurs, the buyer and
the seller each believe they have struck a bargain at the mutually agreed sum.
As Adam Smith instructs us, this is the magic of price in a free market.
So how does
price history guide the investor? Well, it turns out that price movements
develop distinctive patterns of human behavior in the markets. When a stock
or commodity is considered undervalued, the buyers step in, bidding the price
up. Likewise, when prospects for the commodity diminish, then sellers rule.
It the dynamic pressure between sellers and buyers over time that creates the
peaks and valleys we see depicted in the charts. Price history creates
repeatable patterns. Understanding chart patterns is the key to predicting
future price action.
You have seen
in these pages before, I believe one of the best analytic tools for
predicting future commodity prices is Ichimoku
Kinko Hyo. It provides “equilibrium at a
glance”- all we need to know about the state of the traded good as well
as its likely future price. Let’s examine gold using Ichimoku Kinko Hyo, to see if
we should buy sell or hold gold today.
Here is the Ichimoku chart for spot gold. Most trading platforms and
chart services include this indicator set. I use the Thinkorswim
trading platform from TD Ameritrade. It provides excellent technical analysis
tools and Level II access to stock, option and commodity futures markets in a
single, integrated platform.
 
We can see
immediately that gold is in a bullish trend on the daily basis. The Ichimoku Kinko Hyo chart
feature that signals the bullish state is price action above the cloud
(“moku” in Japanese) represented by the
pink and green shaded areas. (Conversely, if price action were below the
cloud, the trend would be bearish). The cloud represents support and
resistance levels. It is constructed by traces of two leading lines, known as
the Senkou Span A, and the Senkou Span B. Together they form the complete
view of longer-term support and resistance. One of the kumo's
most unique aspects is its ability to provide a more reliable view of support
and resistance than that provided by other charting systems. Rather than
providing a single level for support and resistance, the kumo
expands and contracts with historical price action to give a
multi-dimensional view. Also, the kumo projects
support and resistance levels into the future. We can see the cloud is projected into the future, and that in early
March, the cloud changes color form pink to green. This reversal is a bullish
indicator. Without the cloud predicted cloud reversal, we would not make a
long trade today. The projected cloud tells us that resistance level changes to
1710.89 (top of the projected green moku) and
support is 1645.50.
The next set
of Ichimoku indicators important to our trading
decision is the relation of the Tenkan Sen (blue line) to the Kijun Sen (red line). These are trend lines, similar to short-term
and longer-term moving averages. A strong buy signal occurs when the Tenkan Sen crosses above the Kijun Sen from below. A strong
sell signal occurs when the Tenkan Sen crosses from above. We can see the Tenkan Sen made a bullish cross
on January 17th when gold opened at 1635.80. Together with the
price action/kumo bullish indicator, the bullish
projected kumo indicator, the bullish cross by the Tenkan Sen remains intact, so
we are not prohibited from taking a long position as yet. We are close to
deciding, however.
The last an perhaps the most important Ichimoku indicator we need to check is the Chikou Span (green line) in relation to price action and
the kumo. The Chikou Span
is current price projected back 26 periods. The Chikou
Span gauges the strength of the current trend. The bullish trend is strong
when the Chikou Span is above price action and
above the cloud. The bearish trend is strong when the Chikou
Span is below price action and below the cloud. The trend is neutral or week
when the Chikou Span touches prices action or is in
the cloud. We can see that the Chikou Span is above
price action and above the cloud for gold, another bullish signal.
Together, the five Ichimoku
indicators show gold to be in a bullish trend. Ichimoku
trading rules all indicate it’s safe to enter a long position in gold
today, or to hold a long position in a portfolio.
The Ichimoku
indicators tell me it’s safe to buy silver at today’s prices as
well.
Trading precious metals above the clouds
using Ichimoku indicators is an excellent way to
increase the value of your portfolio.
Investors from around the world benefit
from timely market analysis on gold and silver and portfolio recommendations
contained in The Gold Speculator investment
newsletter, which is based on the principles of free markets, private
property, sound money and Austrian School economics.
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