by Bill Cara for the Trader Wizard
With gold bullion up about US$6.40 to about 385 on Friday, and it being Victoria Day (the Queen Mum’s birthday) tomorrow, which in Canada is celebrated with the summer season’s first long weekend (and no trading Monday), I got to thinking of doing an update on gold stocks.
Have you ever visited the British Royal Family’s crown jewels on display in London? Laden with precious metals they are. I found the tour truly remarkable, as I do English history.
While my Dad’s Italian, my own mum is a descendant of the United Kingdom. Her father, a Neely, was an Irish protestant; her mother, a Dobson, a Scot. So, I have an affinity for the British Isles and for Europe. Today, in fact, the city of London is still my favorite to visit.
For centuries, London was the centre of the universe for gold traders. The price of bullion, fixed twice daily, was telegraphed around the world. Most gold exploration and gold mining was financed in the City. Now, of course, Toronto and New York are on a par.
When you invest in gold – I’m talking the bullion here – you do so for the long-term because unlike paper money, which governments continuously devalue, the precious metal is a store of value.
People of Asia-Pacific countries from India to China recognize this value more than most because over the years they haven’t had the economic stability we in North America have long enjoyed. So they accumulate the precious metal over long periods of time more so than we.
Our game in North America has always been paper. Paper stocks and bonds. Share trading. Speculating. Hence the relative popularity of gold stocks here. But, now that the Internet has replaced the telegraph and telephone, traders in China and India are starting to join us in the paper chase – and one thing for sure is that they do understand gold.
The market for gold stocks today is mostly based on the fact the bullion is priced in U.S. dollars, which fluctuate up and down – I call this “ebbing and flowing” in order to give a sense that these fluctuations are not sharp spikes but smoothed wave patterns of trading.
Technically oriented traders will tell you the long waves are more important than the short waves, and they are. What that means is simply that the smoothed price lines of the monthly time series data is more important than the weekly, which is more important than the daily, which in turn is more important than the hourly, and so forth.
So long term investors watch for trend reversals in the monthly data, which they call the long-term cycle. They buy and sell at the bottoms and tops of the intermediate-term cycles. Traders with a shorter time horizon use the shorter time series data.
Back on April 18, in my blog I wrote an article I entitled, “Preparing for a Move in Gold.” I opined that the gold share market was within 5% of an intermediate-term cycle bottom. What I should have added (maybe I inferred it) was that gold stocks are not in a bull market (which means the long-term price trend is down) but with the current or next rally in the intermediate-term cycle, I think that will change.
I am watching the gold shares market – not as closely as I would like but we all do only what we can do – to try to spot that bottom.
Let’s go back to the wave analogy. When there is a trend reversal in the intermediate-term data, you have to then go to the short-term data for confirmation, and to try to determine if that short-term trend is powerful enough to sustain the next bigger wave, and on up the line to the “big” wave.
Investors, like traders, want to be carried on the back of a wave. The traders’ mantra is “go with the flow”, “the trend is your friend” and so on. It pays to take heed. As much as you hope and want prices to go up, if the long-term trend is down and you are in long positions, you are going to be unhappy.
Don’t try to drive on a one-way street against the traffic. Why investors try to do that always amazes me. Investing and trading really is that simple. This is not rocket science.
So, how do we find the trend and determine the cycles in stock prices? That’s always a matter of debate. If you listen to hustlers like WizeTrade and so many others, you will hear the constant pitch that they have a black box solution, and maybe they do, but then why are they selling it to you and me?
What works for me, and it’s never perfect, is to screen the data for many stocks in an industry group. I look at the stochastics, relative strength and moving average departure (MACD) mostly, as well as the fundamentals like PE, dividend yield and book value per share.
The fundamentals are important to me because all trading and investing is a risk – somewhat like a horse race – but you can take an educated risk that often pays off when you avoid really bad fundamentals – even trading the short-term.
Remember, the whole purpose of investing and trading is to create and sustain wealth. If you are trading stocks, these are not even pieces of paper anymore; they are electronic records of share prices. These prices don’t know you and they don’t care about you or your family or your ambitions and goals. That’s funny because many of you treat these prices like they are your children.
With gold share prices, I look at a screen of 30 to 50 stocks regularly. Today, I am going to list for you some of these stocks plus some of the up-to-date data I look at. If anything, you’ll see how I look for entry and exit points in the market.
Again, it may be a mathematical approach, which I like because it is objective, but it’s not precise and it’s sure not rocket science.
Below I will list the stock, symbol and last price followed by a series of stochastics (%K then the %D smoother) for the monthly, weekly, daily and hourly data series. This data changes on an intra-day basis, so you have to monitor it closely at times. I find the data at www.EasyStock.com because I like the charts there, but there are other sources available to you.
The concept here is that by and large, gold producers are in the same business. They manufacture the same product, gold, although some might produce varying percentages of combined metals like silver and copper. They sell at internationally accepted prices. Their cost of production and goods sold is aligned to industry standards, fairly well. Their shareholders tend to have holdings of several other companies in the industry. Hence there is a strong correlation in the prices among the list of stocks in the group.
Here are the %KD stochastic values for each of the (1) Monthly (2) Weekly (3) Daily, and (4) Hourly data series:
NEM $38.40 (1) 24-35 (2) 29-22 (3) 86-77 (4) 71-74 Newmont Mining
ABX $19.88 (1) 30-43 (2) 30-21 (3) 90-84 (4) 65-70 Barrick Gold
PDG $14.75 (1) 29-41 (2) 34-25 (3) 87-83 (4) 63-73 Placer Dome
GG $11.50 (1) 17-22 (2) 28-21 (3) 93-85 (4) 82-86 Goldcorp
KGC $5.88 (1) 24-24 (2) 40-29 (3) 87-89 (4) 60-64 Kinross Gold
GLG $16.00 (1) 52-54 (2) 50-36 (3) 91-91 (4) 59-64 Glamis Gold
I could go on here but you can easily find the complete list and run these numbers yourself if you are interested.
A little explanation might be helpful, at this point.
If you go to the link at www.equis.com/Education/TAAZ/ you will see the Reuters education for Technical Analysis from A to Z. Each popular technical indicator is explained separately. Remember I use several indicators simultaneously but for our purposes today, I am referring to the Stochastic indicator, which is well described at the Equis site.
The numbers above are static but if you look at the chart or if you follow the data periodically you will see whether the %K stochastic is rising or falling, which you must know.
If %K is falling and it is below the %D smoother, then (for new students) that’s a bad sign if you are long the stock. If it has just crossed over by falling through the %D line at a value greater than 80, that is a particularly strong indicator of falling prices; if it turns up and goes up through the %D, especially from a value below 20, that’s a strong indicator of rising prices.
Over time, these trend reversals are easy to spot. How meaningful they are depends on a couple factors, one of which is described at the Equis website.
If, for instance, the %K turns down (i.e., reverses trend) at a point lower than the previous occasion, then that is a particularly strong signal of negative prices to come. Vice versa for when it turns up at a value higher than the previous one or two times.
Now, if, during a down trend, the trend reversal signal comes when the %K is above 50, that’s an indication of an over-extended rally that could possibly be a blow-off of stock, possibly by the “strong hands” in the market. So, be wary of this kind of trend reversal if you are long and have a look to see if the reversal is short-lived.
The other factor that I think is important when using Stochastics (or most of the other technical indicators, really), is the commonality of the reversals for the whole group. In other words, if say a Barrick turns negative, I want to see similar data indicators turn negative for Placer Dome, Newmont and several others before I think much of it.
I want to get a glimpse into the minds and actions of investors everywhere to see what they are all doing. If just Barrick comes off, because say an insider might be selling some stock that day, or a large financial institution is doing a switch from Barrick to Newmont, then I don’t want to go off half-cocked that the gold group is headed south.
If you go through enough gold stock charts using the Technical View at EasyStocks.com, you will see most of the monthly data (the big wave) for the whole gold stocks group has ebbed and has not started yet to flow. It’s bottoming.
Of course, the closer is the %K to the %D value and if the %K number is rising, then the bottom is closer at hand than if there is a wide difference in these values.
Ian Notley taught me that the pattern at the top is just the reversal of the pattern at the bottom. It’s like looking in a mirror. The difference, I find, is that the rate of change of the price data is greater on the down side. Fear is a greater emotion than greed. Hence bear markets are more extreme and shorter than bull markets.
And in a correction within a bull or bear market, which I refer to as a bull phase or a bear phase (just to distinguish in my mind that the picture is a shorter one), the same picture of a trend reversal happens. It’s just that usually a bull phase correction in a bear market is shorter in duration to one that occurs when the bull phase reverses a bear correction in a bull market.
Today, in the gold stocks, the market is in a minor bear correction to an intermediate-term bull phase that if it sustains will soon reverse a bear market, changing it to a bull market for these stocks.
How do I figure that? Well the monthly data for the top ten capitalized gold stocks all have a %K BELOW the %D smoother. Look above at Newmont Mines (NYSE: NEM). At the close Friday, the monthly data series had a %K of 24 and a %D of 35. Same for almost all of them in the top 10. In fact, I think of the whole top 30, only Agnico-Eagle is slightly positive with values of 66/63. To me that is a strong indication of a bear market in gold stocks. Of course, I would also look at other factors to confirm this.
Is there any likelihood, the gold bear will come out of hibernation? Well, we then look at the weekly stochastic readings to see if the %K is rising and has crossed above the %D. Interestingly, the %K values are above the %D and rising in 30 of 30 cases, so there is clear indication of an improving market.
Will the weekly numbers get strong enough to turn the monthly numbers positive? Well, we work ourselves down to the daily data series. As of Friday, the daily data showed 10 of 10 positive, which is a good sign, but only 27 of 30 are positive and several of the others are very close in value.
Could the daily numbers be negative, or be close to turning negative, which would negatively impact the weeklies? For that we have to go to the hourly data. And in this case, there are eight of the top ten, and 11 of 30 in total are negative. That tells me some of the daily values could turn negative. Many of the hourly numbers are over 95 so if there is any weakness in prices, these numbers will start to reverse and head downward, intersecting the %D soon afterward, and going negative.
The upshot is that the numerical values are constantly changing. You can literally watch them change as the last price changes and interest rates and the trade-weighted U.S. dollar ratios change.
By watching this Stochastic data, either in chart form or in the numeric values, for say the top 10 or the top 20 or 30 in the gold stocks group, you will soon start to breathe in and out with these stocks as they move through their cycles.
By doing so, you will definitely start to make better trading decisions. Now you might think that Wall Street has this game all figured out. Let me tell you, they don’t. The reason is that trading is more art than science.
If the numerical data could be spewed out of a black box, with the answer being “buy here” and “sell there” there would soon be a flat market, with all bids the same as all offers. There will always be differences of interpretation and opinion, needs and otherwise, so there will always be trades. That means some of the traders will be winners and some will be losers.
The trick to successful trading is to have more winners than losers and to have those winners average more than the average for the losers. This is important when you are trading by numbers. The reason is that you are trying to spot a trend reversal and if you are too early you are going against the trend until it proves it has reversed.
If you are wrong enough times, you will have more losers than winners. Besides, after the turn the magnitude of the next move (in your favor) will not be as great because you were in too early and part of the reversal is used up just covering your losses. Besides, all that process eats up time and time costs money.
One of my big weaknesses is that when it comes to gold stocks, I am like too many others who are distracted by the glitter of the precious metal. I get excited and tend to get in too early and out too early, regardless of the numbers. The results are apparent. I am not as successful in trading gold stocks as stocks in other sectors, particularly the financials and techs.
There is a lot to learn about trading, especially if you are going to do it well. I will not forget one day when I sat for the first time in a professional trading room with a team of young and overly aggressive traders. As I sat in with the head trader, chatting and observing, I would interject something like, “I wouldn’t do that,” which of course he would totally ignore. Then I would say it again.
After about three interjections in 15 minutes as he was busy hitting the buy or sell button, he started to see that he had been making the bad moves I warned him about. So, he stopped and turned and said, “how did you know that?” I told him I didn’t “know” anything but the indications on the technical indicators I was also watching on one of his many displays showed me his timing was wrong.
What style he was using is an old one that long ago has ceased being effective. He watched the Level II buy or sell orders build up or get removed in order to decide whether there was positive momentum or not. That’s simply a “bait and switch” ploy used by many trading desks to suck you in.
Traders seeking to scalp small fractions like to trade the way of my associate but he would find out (and should have known) that only when the easy-to-dupe public trader would go for the bait, does that strategy work for traders like him. You will not beat the pro traders at Knight Trading and Goldman Sachs with that approach.
This is not to say I am a good minute-to-minute trader. In fact, I am not. I would not last too long on the trading desks I just mentioned. But I am a Trader Wizard, nonetheless, because I understand how capital markets work, which is something, with respect, most of the today’s proprietary desk traders do not.
I understand the game and I know that if the Knights and the Goldmans (the casino dealers) also know my cards, then it is going to be near impossible to beat them.
But you and I (and them and their clients too) don’t know what’s going to happen to the dynamics of the major market forces over the next several weeks, so they are holding no long-term fixed orders from brokerage clients. These principal traders don’t know what their order flow is going to look like tomorrow or next week, so that levels the playing field somewhat.
Next, I know that these pro traders are being advised by economists and financial analysts who don’t know a trader’s hat from a dunce cap.
Now, that is my strength, so I don’t mind playing the game on my own terms.
To conclude today, trading to me is just very short term investing. That’s investing in stocks and not companies like the venture capitalists do.
To trade stocks you have to know the technical, quantitative and fundamental numbers and you have to put the picture of a single stock into its industry group and sector and then into a global markets perspective that is impacted by the same interest rate, commodity price and economic data.
Traders have to know some fundamentals like PE and cash flow per share and dividend yields and ex-dividend dates, but unlike these Wall Street firms like to jerk you around with their stories, you have no need to know very much data about a company. It is not informative to read whether the company who shares you trade is led by a Wharton School finance whiz who is connected to Donald Trump and so on. That’s just stuff to get you off your numbers and your ability to look at markets objectively and make decisions independently.
Good fortune, as they say, with your gold share trading. It’s not a matter of luck when you follow the numbers.
Finally, you know that I get some of my data from a service called EasyStock. So, this is a plug for John Cheng’s EasyStock.com (which for some reason he also calls Investertech.com) simply because he is an independent data service who has proven himself with 7x24x365 online data since 1997 working out of L.A.
John is a former NYC trader who knows his stuff. Now, you can get all this data – and a whole lot more – free, but if you decide to pay for his service, it is very inexpensive and you get even more stuff that could help you totally organize your approach to trading or longer term investing. You will find a lot of fundamental data there as well.
If you do decide to use EasyStock/Investertech, please give him my name with a cc to me. He will then make a small deposit to my webmaster in Sao Paulo, which helps pay for all the computer time I use bringing this free letter to you.