Gold & Silver Chart Patterns: pair trading opportunity?

Regular readers of this blog know that I’m not a great fan of investing in precious metals. Neither do I trade for the short-term, nor do I recommend that small investors should indulge in trading. But sometimes an opportunity stares you in the face – as the one year gold and silver closing chart patterns seem to be doing now.

Gold Chart Pattern

The technical headwinds that the gold chart was facing last month led to a decent correction below the 14 day SMA. Such corrections restore the health of the bull market and provide good entry points.

Isn’t gold’s price near an all-time high, and shouldn’t one be cautious? The current investor interest in gold has been largely due to the weaknesses in the dollar and the euro. The currency weaknesses aren’t going away any time soon. Gold’s bull market is likely to test and surpass its recent peak of 1565.70.

But it is a good idea to be careful – more so because gold’s price and its 14 day SMA have both risen far away from the rising 200 day SMA. A deeper correction may be around the corner. Stay invested with a trailing stop-loss.

Silver Chart Pattern

The technical headwinds turned into a full-blown hurricane in silver’s chart pattern. A 33% correction from the peak of 48.70 to a trough of 32.50 has shaken off the speculators.

Silver’s price has been consolidating within a triangle pattern and has edged above the 14 day SMA, but remains below the falling 30 day SMA. The possibility of a breakdown below the previous low and a test of support from the rising 200 day SMA can’t be ruled out.

The pair trade? Long silver, short gold. But remember – I have no skin in this game!

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jun 03, ‘11

S&P 500 Index Chart

The erratic behaviour of the S&P 500 index chart may be best described as ‘the last hurrah’ of the bulls. The 200 day EMA is still rising and the index is trading above it – which means a bull market - but things are not looking pretty. At the time of writing this post, the S&P 500 is trading below the Apr ‘11 low of 1295. A deeper correction is likely.

The index managed to close exactly on the 1300 level, for its fifth straight lower weekly close. Bulls seemed to be in a festive mood after the Memorial Day long weekend, as the index jumped above the down trend line (connecting the intra-day tops of May 2, 10 and 19), supported by strong volumes on Tue. May 31, ‘11. Bears attacked immediately, and pushed the index below the 50 day EMA on Jun 1 ‘11. The downward drift continued for the next couple of days, breaching the lower edge of the Bollinger Band.

The technical indicators are quite bearish. The MACD is falling below its signal line, and both are in the negative zone. The slow stochastic found resistance at its 50% level, and dropped sharply into negative territory. The RSI is below the 50% level.

The economic growth remains lukewarm. Same-store sales in retail outlets were below expectations in May ‘11. Initial unemployment claims dropped to 422,000 – remaining above the 400,000 mark for the eighth week in a row. Only 54000 new jobs were created in May ‘11 - less than 50% of the expected 125000. The Institute for Supply Management reported that its services index was at 54.6% in May, a bit higher than 53.8% in April.

FTSE 100 Index Chart

In last week’s analysis of the FTSE 100 chart pattern, I had mentioned that a convincing move above the 5950 level may provide an impetus for the bulls. The index breached the 6000 level intra-day on May 31 ‘11 and closed at 5990 – supported by good volumes.

The bears quickly extinguished bullish hopes. The index dropped below the 50 day EMA on Jun 1 ‘11, and by the end of the holiday-shortened week, tested support from the 200 day EMA once more. The down trend from the May 3 ‘11 top remains intact.

The technical indicators are looking bearish. The MACD has slipped below the signal line in negative territory. The slow stochastic had a brief foray above the 50% level, only to drop down. The RSI is also below the 50% level.

The IMF has supported UK’s austerity measures and suggested tax cuts for low-income households, but noted that weak economic growth and the pick-up in inflation over the last few months had been "unexpected". 

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices have spent a month in down trends. Things can get worse before they get better. This is a good time to remain on the sidelines and wait for the down trends to play out.

Why technical and fundamental analysis are the two feet of a stock portfolio

Have you tried to stand on one foot for any length of time? Unless you are an expert in hathayoga, you won’t be able to do it for more than a few minutes. Even if you are able to balance yourself for 10 minutes on one foot, what purpose will be served? You won’t get anywhere! Like you, your stock portfolio needs to use two feet – technical analysis and fundamental analysis – to achieve success.

Being an engineer by training, technical analysis always appealed to me more when I started investing in the stock market. Semi-logarithmic charts, trend lines, symmetrical and right-angled triangles, rectangles, parallelograms, Fibonacci retracement levels were familiar terminology. I took to them like a duck to water.

Well, not quite. After losing a ton of money, I came to the fairly simple conclusion that familiarity with the terminology was not the same as knowledge of the subject matter. Understanding different chart patterns is not of any use unless you know which stock charts to study. But the alternative wasn’t intellectually stimulating enough.

Fundamental analysis meant dissecting the contents of Annual Reports. No exponentials or double integrals to apply one’s math skills. Just a bunch of numbers that needed to be added and subtracted and divided to unravel the secrets of well-disguised financial performances. Low-level clerical stuff – or so I thought.

Finally, a broker friend opened my eyes. He only had a B. Com degree but was rolling in cash and driving around in new cars. So I asked him what the secret was. His answer shook me up. Just plain grunt work, he said. Wading through annual reports to find financially strong companies that generate cash and don’t require too much capital to function.

How do you decide when to buy or sell?, was my next question. This is where a bit of knowledge of technical analysis can help, he responded. You have to first determine the trend – whether up, down or sideways. Moving average crossovers and support-resistance levels can then be used to determine entry and exit points.

That is all there is to it. No rocket science. Just school-level arithmetic, including familiarity with graphs and the discipline to go through annual reports in detail. Don’t have time and energy for all this hard work? Avoid individual stocks; buy mutual funds.

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