Gold and the 61.8% Fibonacci Retracement Level

I was looking at where Gold finished up last Friday afternoon and saw something that piqued my curiosity. The low last December was around $1524 and the high following that was around $1792 in late February. And last Friday price closed at about $1628. Hummmm... I began to wonder why price stopped at that particular price level. $1628 - what is so special about $1628?


Never satisfied with not knowing the answer to something I think I can figure out myself, I took a Fibonacci measurement and there it was - $1628 is the 61.8% retracement level of the December low and the February high.


Well, so what and who cares?


But instead of letting it go at that I began to wonder a little more. I wondered how often the price of gold makes these curious 61.8% retracements. Is it random or does it happen frequently? 


So of course I had to find out and that is what this post is all about. But first, here is the first chart that seduced me to spend 4 hours making the next three charts.

Click on any chart to ENLARGE


As you can see, gold stopped last Friday right at the 61.8% retracement level of this nearly 5 month long intermediate cycle.


That was a really big move last week. I wonder if it will retrace? I guess one way to find out is to study a 60 minute chart during this entire intermediate cycle period and see what I find out. The task I assigned myself was to find evidence that gold rallies retrace 61.8% - so I did and here is what I found out.......


This first chart looks only at the month of January. Though not particularly elegant I decided to draw a light gray line at the location of 0% retracement, then use a particular color to identify the 100% level and below that, using the same color, the 61.8% level. For each instance I decided to use a different color hoping to make it a tad easier to count the frequency of these curious retracements.

Wow - that's rather interesting. There were 7 of these things and an eighth that is part of a bigger 61.8% retracement that will find its conclusion on the next chart. As a matter of fact, it looks like every single rally was followed with a 61.8% retest...except the monster rally of January 25. That particular advance, by the way, was followed by numerous retests of the 50% retracement level which are not shown.


Okay, next chart. This one of the month of February.

Looks like 4 incidences to me, not including the larger one (magenta concluding on the far right) that began on the previous chart. Once again it appears that most rallies do indeed retrace 61.8% - and usually within 10 trading days or less.


Last chart. At this point my eyes were screaming they had enough so I made this chart to cover March - May. (You can do that when you write this stuff for fun and not for money).

Here again it looks like we caught some more fish - like about 9 more. 


Oh, before I forget, the diagonal magenta line traversing bottom left to mid right is that C-Wave trend line I wrote about a couple posts ago - discovered when I changed my display to log scale. And note that it became resistance for price last week. Should we be surprised?


So, one last maddening question. If last Friday's rally was a short term top (as it appears to be at the 61.8% retracement of this intermediate rally and also against the resistance of a multi-year trend line) I wonder what price level would qualify for a 61.8% retracement of Friday's rocket ride?


OK, I put a little red line on the side of the chart. $1578


And if the way this works uses instead the lower $1532 low of Wednesday morning, the calculation comes out to $1570.


Well that's it. Best to you and your trading this week,


John
tsiTrader@gmail.com

Sold NUGT @ $12.80 - US Dollar: How Overbought?

I was fortunate today to sell my position in Direxion's Gold Miners Bull 3X ETF (NUGT) for $12.80. This trade resulted in a gain of 45.45% and is, as best I can tell, the largest single trade gain I have logged since starting this website a couple of years ago. A very nice way to conclude the last day of my 30th year as a public school teacher.


My TSI Trading record has been updated.


Click on any chart to ENLARGE.

I wanted to give readers a sense of the degree to which the US Dollar is overbought and created the following series of three daily charts of the buck - dating back to 1992. For each chart I am using the Stochastic Momentum Index (SMI) invented by William Blau (also creator of the True Strength Index (TSI) indicator) and using a setting of SMI (17,5). This magnification is ideal for getting a timely read on the overall status of price movement. A faster setting, such as SMI (5,3) is great for very short term trading and a slower setting, such as SMI (28,14), while exhibiting a noticeable degree of lag, paints a very broad view of price and trend momentum.

Our first chart (above) looks at the daily /DX US Dollar Index from late 1992 through 1998 and notes those occasions that the indicator reached levels exceeding 80. At this time (15-20 years ago) the buck was in a bull market that did not top until mid-2001. In this bull market environment one would expect that price would be able to stretch significantly to the upside, and it did.

Our second chart looks at the US Dollar Index from 1999 as it approached the peak of it's bull market in 2001 and its price performance thereafter into 2005. Notably absent during 2001 - 2004 are any instances that the index was able to stretch the SMI indicator above 80.

And this brings us to our final chart of the US Dollar - from late 2005 to present. Other than for the '08 episode, the index has not been able to stretch above a reading of 80. But for the past 4 trading sessions, the reading has climbed above 80. Last evening I observed it at a sky high 87. 


So how overbought is the US Dollar Index right now, you wonder? Well, other than for 2008, and using this particular Stochastic Momentum Index metric, it is more overbought than any time since July 1998. That's nearly 15 years.


And the question, at least in my mind, is what is going to happen to the price of gold and value of mining stocks when this historically overbought condition in the US Dollar Index begins to normalize?


(Read my mind).  :-)


Best always,


John
tsiTrader@gmail.com

BUY NUGT $8.80 GSS $1.06 - Gold/Dollar

Two more days of school left - HOORAY!!! 


A couple weeks ago I bought a slug of Direxion Gold Miners Bull 3X ETF at $8.80 (NUGT), made the chart then did not get around to posting the trade. Yes, it's been that kind of month (and Year #30) but it's nearly over, thankfully.

Today I made a new purchase of Golden Star Resources (GSS) at $1.06. The daily chart had a favorable trend line break BUY signal on both the True Strength Index (TSI) and the Money Flow Index (MFI) indicators.

I had been eyeing this gold miner and a couple others for several days and decided to just buy and prepare to sit.


Several fundamental issues interested me in Golden Star Resources (GSS). First, the stock sells at only .6X tangible book value ($1.06 vs. $1.71). That's cheap. There are only a few other miners on the AMEX in this 'discounted book value' range - JAG, AUMN, CDY, GBG and CGR. Of these comparables GSS seems to have the most favorable positive earnings projections going forward into the next couple of quarters, and additionally has ZERO long term debt.


Second, of the $1.06 share price I payed, the company has 44 cents in CASH. So, subtracting out the cash per share, I actually payed 62 cents per share for $1.27 of tangible gold. ($1.71 - .44 = $1.27) ($1.06 - .44 = .62). That is a true bargain considering the company is in production and the upcoming quarters are expected to be profitable.


Next, I considered significant insider buying of GSS in the past week and an unusual company reiteration of favorable guidance for the upcoming quarters. 


And finally, GSS is included in both Market Vectors Gold Miner ETFs - GDX and GDXJ. My thought is that once the US Dollar tops, miners and gold should explode higher. And, as the demand for both these ETFs will likely strengthen, so will the stock price of GSS.


A couple of weeks ago I wrote a post that rather apologetically mentioned that gold could, from a historical consideration of C-Waves, have further to fall. My two issues of concern were the consistent retracements of all C-Waves in excess of 50% during their ensuing D-Waves (this one has only retraced 38.2%), and the trend line of this C-Wave did not appear to have broken, as was the case in all preceding C-Waves.


Then last evening I got the bright idea to change my ThinkorSwim price chart display to 'Log Scale' and see what that did for my gold chart. To my surprise, it changed absolutely nothing except the current C-wave trend line - which appears to have indeed been broken 16 trading sessions ago. 

So perhaps the plot has thickened and gold is in much more of a bullish situation than I previously thought. 


In the first 15 minutes of NYSE trading this morning gold was pushed down to $1532, then rallied nearly $40 to $1571 before losing a bit of steam to settle at $1564 - this despite a monster rally in the US Dollar. That got my attention.


Speaking of the US Dollar, at present it is 4% above its 200 dma. The buck achieved this metric this past January then went into a steep correction. Last late-September the buck nearly reached the 4% mark above its 200 dma before falling into a sharp correction. And in June of 2010 the dollar made a major peak and was able to hold between 5 and 7% above its 200 dma for a matter of 4 weeks, then fell precipitously for the better part of 5 months.


In each of these three occasions, interestingly, gold behaved differently. In December 2011 gold first reacted by plummeting from $1750 to $1550. Then just days before the US Dollar peaked, gold began a 2 month rally from $1550 to just under $1800. In early September 2011 gold peaked above $1900 and managed to hold above $1800 for several weeks while the dollar put in a sharp rally. With only 9 days left in the buck's rally, gold finally gave up the $1800 level and promptly plummeted to reach the $1535 level. The June 2010 episode saw gold essentially tracking the dollar.....rising from $1140 to $1250 as the dollar mounted a huge rally that then came crashing down (with gold sympathetically retreating back down to $1160).


So while it is true that the US Dollar and gold tend to move inversely to one another, it certainly is not true all the time.


Anyway, here is a current look at the US Dollar Index with an eye on the True Strength Index (TSI) momentum indicator, Gold futures, and the % the Dollar is currently above its 200 dma.

My TSI Trading record has been updated.


Best always and keep in touch,


John
tsiTrader@gmail.com

Gold Going Below $1430? $1395?

It feels almost ridiculous and nearly irresponsible for me to suggest that gold will fall to below $1430. Personally, I think it has fallen way too much already. In a very short period of time the value of my holdings in mining stocks have been cut in half and I have no interest whatsoever in seeing gold tank even further. 


But for what it's worth, I see a good possibility that gold has further to fall - much further. 


Last summer I did some research on Gold C-wave Tops and D-wave Retracements. I think I was able to boil down the most important statistics and make some sense of the topic generally. Some of those findings include that the range of C-wave corrections (D-wave) is from 54% to 89%, that all previous D-waves corrected 50% within the first 32 trading days, and that most D-waves were in the range of 40 days, with the exception of the 2008 nightmare specimen which was 152 trading days.


One of the things I did not mention in that study is the fact that every C-wave top, with the exception of the 2002 specimen, was followed by a (one) left translated intermediate cycle.


Anyway, at the time I did this study it never occurred to me to specifically determine whether the C-waves ever/always/sometimes break their trend lines within the D-wave corrective phase. 


As you may now be guessing, this is something I have been looking at very carefully today. It turns out that every C-wave  has indeed broken its trend line during its ensuing D-wave. And it turns out that our current C-wave has yet to break its trend line. A price south of about $1430 seems to be the qualifier.


I'm going to show you a chart of each C-wave from 2002 and have added the relevant trend line on each.  I have not taken the additional time to identify (label) the repetitive ABCD pattern, but I have indeed considered each very carefully.


Oh, before I forget, the current C-wave top was followed by not one, but two left translated intermediate cycles. That has been a new twist which I imagine should not be too surprising considering that this C-wave dwarfed all previous specimens.  


Also, at today's closing price of $1544 this D-wave has nearly retraced 38.2% of its C-wave. A price in the neighborhood of $1520 would make a 38.2% retracement. The 50% retracement level, should this correction decide it needs to make the minimal historic retracement, comes in at $1395.


Will gold make it low enough to break its trend line? Worse yet, will it make it to the 50% retracement?  


Beats me. I sure hope not!


In any event, I am absolutely NOT selling any of my mining positions for a loss. Period. I learned a very good lesson in 2008 and plan to make it pay me back this time. 


Best wishes for your success, always.


And now, those C-wave trend line charts.


Click on any chart to ENLARGE

BUY CGR @ $0.89

It looks like Direxion's Gold Miner Bull 3X ETF (NUGT) closed nearly 7% lower today than my sales price yesterday and that I was very fortunate to avoid that draw-down today. 


Looking at the True Strength Index (TSI) yesterday using the (7,4) setting I noticed that the TSI slope on gold (/GC) appeared to have temporarily topped and the stock market (/ES) TSI slope had flattened.  Today both of these metrics indeed turned lower and NUGT deflated as I feared may happen.


Turning to a major holding in my retirement plan, I noticed that Claude Resources Inc (CGR) has been setting up nicely and so I decided to re-allocate my cash with a purchase of CGR at $0.89.  The stock is now selling at well below book value and the earnings projections for this and next year continue to be strong. 


My TSI Trading record has been updated.

Sold NUGT @ $13.40

I sold my entire position in Direxion Gold Miners Bull 3X ETF (NUGT) today for $13.40 and a modest 7.2% gain. My best guess is that the miners are going to continue to rise, but taking a profit was what seemed like the thing for me to do for today.  


Today is something like Day 20 of Gold's Daily cycle and looks like it is now forming the handle of a cup with handle pattern. So, I do not intend to stay away from this long miners trade for long.


My TSI Trading record has been updated.

BUY NUGT @ $12.50

I've been spending whatever kazillion hours I (don't) have writing new True Strength Index (TSI) indicators for the past month. Actually, they are not indicators so much as experiments. Anyway, I wish I could report some promising breakthrough, but alas, I cannot. The trend line break, ZERO crossover and positive/negative divergence BUY/SELL, while never 100% reliable, are still the best techniques.


I have been thinking that the mining stocks have become stupid cheap once again, so when I saw some favorable price movement today I decided to load up on Direxion's Gold Miner Bull 3X ETF (NUGT) at a $12.50 purchase price. 


Most likely I will flip this fairly soon - hopefully for a gain. 


My TSI Trading record has been updated.