Metal Stocks & Moving Averages

The gold community loves (rising) gold stocks.  On that note, I have a new buy signal in play, for swing traders. 

You are looking at the GDX weekly chart.  In a trending market, this 4,8 moving average series has a solid track record of getting investors in and out of intermediate trend moves.

Minor trend weakness could be created by the release of three key reports this week.  Both swing traders and long term gold stock investors should use should use that weakness as a buying opportunity.

There is an FOMC announcement on Wednesday.  Then, Barrick Gold Corporation issues its quarterly report on Thursday.  On Friday, the US labor department releases the jobs report.

It’s very likely that at least one of those reports creates a sharp sell-off in gold.  That would provide swing traders and investors with a good entry point, to act on my buy signal.

While a bullish moving average crossover is in play now, acting on that signal still requires some fine tuning.  Substantial patience is required, regardless of how bullish the buy signal appears to be.

That’s the daily chart for gold.  Note the tentative sell signal in play on my stokeillator (14,7,7 series Stochastics) at the bottom of the chart.

Gold is in a position of short term danger.  It’s hard to know how gold stocks would react to a sell-off in gold, but if they did decline, both traders and investors should be very aggressive buyers.

I’ve been a seller of gold stocks in this general price area, but on any tiny pullback I’ll be a much more aggressive buyer, because of the increased number of bullish technical events that are occurring on a daily basis.

I’d like you to take a closer look at the gold price action. That’s the hourly bars chart for gold.  Gold has been trending higher, within a channel.

Note the thick blue and black trend lines that define the channel.  Since peaking in the $1348 area, gold has traded in a very tight range, forming a small triangle. 

It’s likely that one of the three key reports this week will trigger a move out of that triangle, down towards either $1266 or up to the $1380 area. 

If the move is up, traders need to book more profits, and that move would really “solidify” the GDX weekly chart buy signal that’s in play now.

Silver stocks can dramatically outperform gold stocks, when a trending move gets underway. Is there also a buy signal in play on the SIL-NYSE weekly chart, for swing traders?

Yes, there is a key buy signal.  You are viewing the SIL weekly chart, and I’d like you to look carefully at the moving average signals that appeared in the summer of 2012.

Most investors use the 50 and 200 day moving averages, but that subject investors to enormous drawdowns.  My 4,8 weekly chart series has the benefit of very limited drawdowns, as you can see during that summer of 2012 period.

The current swing higher has carried SIL from $10.54 to $14.19.  That’s about 35%, which is a substantial move.  Silver stock buffs should wait for a minor “hit” before taking action on the buy side.

For gold bullion swing trading, I like to use a little bit longer term moving average, to smooth out some of the false signals that can occur.

On this weekly gold chart, I use the 5,10 moving average series to identify potential trending moves.

Note the action of the Williams oscillator, at the top of the chart. I’ve highlighted part of it with a big red circle.  Oscillators work pretty well during a period of sideways price action, but the moving averages have superb track records when a trend is in place. 

The Williams indicator generated a lot of false buy signals over the past 9 months, while the 5,10 moving average series was impeccable.  Using this moving average, a buy signal for gold is not quite in play, but not quite here.

Silver bullion traders have the “privilege” of acting like gold’s little brother, in the market.  Ironically, more false signals can be generated on silver bullion charts, than on silver stock charts. 

For swing trading silver, the 4,8 series seems to provide an optimal blend of managing risk and reward.  A buy signal is closer than it is for gold, which should be good news for silver enthusiasts.  There are more false signals, but if you want the upside potential that silver brings to the table, you need to accept either more false signals or bigger drawdowns.

I never embraced the “growth with safety” trade (buy bullion and sell gold stocks) that was promoted by some gold analysts.  Swing traders have a great “growth with risk” opportunity right now in gold and silver stocks, and with a dollop of patience, it should be a winner!

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Stewart Thomson

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