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October 24, 2013

Golden Dawn

The precious metals complex delivered a wake call today as gold's daily view in my statistical system flipped to bullish, implying that an intermediate low was left behind in mid-October. This interpretation is supported by an extremely positive reaction to an earnings report from a major producer, Agnico Eagle, which saw its shares soar 18%. Positive reactions to earnings are a sign that gold bulls have an appetite once again. I initiated a long in the yellow metal today, but began with a modest position as a couple of potential resistance points are just overhead:

The $1350 level has proven a strong pivot a half dozen times in the last six months. Gold made a valiant effort to conquer that level during the post-Fed rally but was slapped back down a couple sessions later. So a push through $1350 would constitute a very positive sign. More importantly, the 150DMA, a historically-important moving average which halted the initial advance out of the June low, lies less than 2% above. Gold has not managed a close above the 150DMA since January, so a push through that level would deliver a strong affirmation for a bullish framework. I will look to add to my position on a close above that average.

The formation of a right-translated intermediate cycle for gold also opens the door to equity purchases. However, any positions must be affirmed by the STS, and such affirmations depend on weekly closes. Scanning through my data, I see a couple of potential purchases this week. I will buy some Franco Nevada tomorrow if the shares look like they will close above $45.50. ABX has a buy trigger right at $20. Silver Wheaton is a bit further away from its trigger near $25.50, but a $1 move for these shares is well within the realm of possibility.

I am sure that many Members are pleased by the fact that the STS enables me to communicate more specific entry conditions. A couple points of caution should be noted, however. First, a primary deterrent to the practice of real-time trade signaling for me has been the fact that this letter is intended as a discussion point among professional traders who are accustomed to making their own trade decisions. I simply do not want to convey the idea that The DOCument is intended as a substitute for one's own analysis and discretion.

Second, like any system, the STS is prone to false signals. The unification of cycles and the STS certainly offers a more potent methodology, but the word panacea is not applicable to the trading profession. For this reason, I like to initiate trades with small positions and build size as the trade proves itself. Mark Ritchie, interviewed in The New Market Wizards, stated that an initial position should be so small as to seem almost like a waste of time. I don't initiate quite that small, but the point is taken: you don't want to be stressed out if you quickly get knocked out of a new position. With small size, a stop can be exercised unemotionally, and then you can sit back and wait for your next signal.

Let's move on to the rest of today's analysis. The dollar failed to use yesterday's indecision candle as an opportunity to form a swing low. So the DX continues to betray weakness and may produce another panic day or two before finding a cycle low. I have no intention of re-initiating my short, however. My profits have been booked, and I will simply await a defined entry point entailing a rally out of an intermediate cycle low followed by a new sell signal within our unified methodology.

Oil produced a bullish reversal today.

By itself, this type of volume observation does not hold much water, but keep in mind oil's daily cycle is already stretching long. We should soon see a strong enough rally to break the daily downtrend. Because oil reversed its weekly triangle breakout, as highlighted yesterday, I do not currently have a plan to try a long trade. I would like to see how crude reacts to the dollar's impending intermediate cycle rally. If oil does set an ICL and begin a new, multi-week rally, we will have plenty of time to identify an entry point and take a stake.

Docfolio Update: Bot gold


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