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The Golden Indicator
by Chris Vermeulen
I find from time and time that gold
stocks tend to lead the price of gold during extreme times and as I mentioned in
last weeks report the HUI index has warned us up to 7 days in advance, before
gold made sizable drop. Well this week is a perfect example in my opinion.
The charts below show how gold
stocks became bearish much quicker than the price of gold indicating we should
see lower gold prices soon. This time the HUI index gave us 5 days advance
warning that gold will eventually drop quickly to catch up and the chart below
show this.
How to Improve You Exits for Gold
Trades
Use the next higher time frame chart for spotting key support and resistance
levels.
When Gold, Silver or Oil is near these S/R levels look for their stocks to shift
momentum and start to reverse and breakdown. This is when you want to take
profits.
Note: If the price reverses at or
near the support trend line, adding to your position is always an option as long
as you are within 3-5% of your trend line stop price.
Longer Time Frame Chart of Gold –
Weekly
Gold Stocks as a Leading Indicator –
Daily Chart – Trading Signals
Gold stocks have the tendency for smart money moving in and out just before gold
makes its move. This sends stocks drastically higher or lower and gives us the
warning. This is something that I have traded for a long time and if I have a
large portion of my portfolio in gold I like to lock in profits when it looks
like stocks are topping. I would rather take a profit and see gold continue
higher with the balance of my invested money, than see gold correct and for me
to give back all the gains.
That being said lets get on with the
charts. I do apologize for all the annotations on the charts. I really do hate a
chart crammed with stuff but I want to try to get the basic point across
although I am just scratching the surface here. The chart below is of the HUI
Gold Bugs (Gold Stocks Index). As you can see there are several things happening
on the chart, from the basic wave count to a simple stochastic indicator and
MACD. But I am going to focus on the price action mainly for this live example.
The gold bugs index made a double
top and closed below our support trend line 3 days later. That trend line
breakdown also made the MACD & Stochastic cross giving us 2 more reasons to
think we are going to see lower gold prices. The key here is to notice that the
trend line was broken on Jan 7th with all my indicators going negative.
Gold Stocks Leading the Price of
Gold – Daily Chart
Gold Lags Gold Stocks by 5 Days –
Daily Chart
Gold held is value above our support trend line on Jan 7th while gold stocks had
made a much larger move and closed below its trend line. What I like to do with
this type of situation is exit the balance of my position. I generally like to
give my positions the benefit of the doubt but when gold stocks start to go
sour, I like to protect my profits. This is called “technical risk management”
and it can boost returns by 1-5% per trade if done properly. For this trade
alone it would have given us and extra 3.6% profit.
This chart below shows where we had
a sell signal for gold if we used the HUI as our exit signal. It is 5 days
before GLD broke our support trend line.
Gold GLD Lagging Gold Stocks to
Our Advantage - Daily Trading Chart
Conclusion: Trading Gold Using
Gold Stocks as an Indicator
Trading is difficult, but following a set of parameters and using the proper
type of risk management for that strategy is EXTREMELY difficult. This is where
most people fail and mi not afraid to admit I make several mistakes trading each
year. Once you toss real money into gold, silver, oil or any investment vehicle
most people start to see the charts backwards. I have this problem all the time
because I look at charts all day and some times I start to wonder what I am even
looking at. That’s when I take my dog for a walk to get a fresh mind. Also
writing down your trading setup with your goal to take partial profits as well
as setting your stop order is crucial to staying on track. This is just
scratching the surface of improving your exit strategy but it will make you a
lot of money when trading gold.
If you would like to
receive my free weekly Special Trading Reports please visit my website.
Chris
Vermeulen is Founder of the popular trading site
www.TheGoldAndOilGuy.com.
There he shares his highly successful, low-risk trading method. For 6 years
Chris has been a leader in teaching others to skillfully trade in gold, oil, and
silver in both bull and bear markets. Subscribers to his service depend on
Chris' uniquely consistent investment opportunities that carry exceptionally low
risk and high return. Reach Chris at: Chris [at] theGoldAndOilGuy [dot] com
This article is
intended solely for information purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor before
making any investment/trading decision. No responsibility can be accepted for
losses that may result as a consequence of trading on the basis of this
analysis.
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