Gold is bearish in the news, but bullish in the charts?

People in the mainstream media have started to become bearish of gold.  Perhaps it is because of the almost 1 year downtrend in its price?  Media is notorious for noticing trends nearer their turning points than nearer their onset.  I believe Gold may be a current example of this and actually be setting up a bullish signal versus a bearish one.

The chart below shows the price of gold over the last two years, including the seeming bull flag/triangle that is currently in formation.

Gold chart link

I see major support in the $1530 area, which once again today held.  This support zone allows a potentially good trading opportunity in gold.  With support just 2% below, a low risk higher reward buy opportunity may be presenting itself.  A purchase of gold here with a stop at $1520 (aggressive traders) or at $1470 (longer term traders) could be a good play as I am seeing bullish signs in the chart (in addition to the contrarian buy signal set by the media).

Besides the positive longer term divergence and solid support, a bullish flag/triangle looks to be forming with the red and black trendlines helping show points of recognition.  A break above the red downsloping line and then the black resistance line (notice the parallelism with the other black support line) would help solidify the bullish case.  A move beyond the recent high ($1900) would be a likely a target of such a breakout.

If all of this comes to fruition then it likely would mean a rally in equities as well, given the high correlations between gold and the equity markets.

Good Luck!

Siemens Stock

Siemens Stock Chart
I had a request to look at Siemens stock for a long entry.  Here is what I notice...

Siemens stock price currently is flirting with a very strong support zone in the $80-$85 area.  On the surface this gives the stock a low risk high reward buying opportunity.  Major recent support is at the $83 and $82 levels and 2 year support is in the $78-$80 zone (primarily 2010's consolidation period).  All of this makes for an excellent stop loss position at only $2-$7 below the current price levels.  $82-$83 should be used for aggressive and shorter term traders and $78 stops should be used for the longer term investors.

From a general trading perspective, the profit target of a trade should generally be at least 3x the stop loss level, so at a minimum we would want a $6-$21 profit target.  This seems doable given the previous price highs and thus resistance levels ( @ $108 and $105).  The 3x profit/loss rule helps overcome the inevitability of not always being right about a trade.  With a supposed 50% hit ratio, a 3x profit/loss requirement keeps a trader profitable.

More conservative traders would want to wait for, at a minimum, the downsloping red trendline to be broken by price before entering the trade (currently at $87 and falling).  However, as long as stops are used a portion of total capital could be deployed currently.  Positive divergences and the oversold RSI reading currently help the bull case as well.

Having said all of this, sticking to the stops is very important on this stock.  The reason is the huge potential head and shoulders pattern that could be forming with the 2010 churn the left shoulder, the head in 2011, and now forming the right shoulder with the slighly up sloping neckline currently at $82 and/or having already broken down.  Any break below $78 would seriously put this chart at risk.  A break below $78 would also likely imply that European markets are breaking down hard as well.  If price breaks below that level, look out below!

If the bullish scenario plays out, we can use trendlines (just as we are using the red lines now) to help decide when to take profits as well.  We should be able to connect the higher lows to help watch momentum on the upside and decide appropriate times to take profits.

Good Luck!

Costco breaks down from long term trend

Costco breaks down from long term trend linkable real-time version (may need stockcharts.com subscription to view)

Now this is a beautiful chart...albeit a little late.  A 3 year ending diagonal breakdown on Costco may spell doom for the company's stock.

It would be perfectly acceptable for the stock price to rally back to the underside of the lower trendline, but as of now and each day it postpones, the odds are looking less and less likely.  The one hailmary Costco may have is that its volume has not been that impressive on the downside, which means there are still a lot of long term holders of the company's stock that bought back in 2008 and 2009.

However, the amount of volume at the current prices leaves a lot of room to the downside if long term holders get scared.  Notice on the left side the volume by price analysis which shows the major support of buyers in the  $55 to $65 range.  Before reaching that level, the $78 dollar area is the next support zone.  After that is the 2008 high and 2010 lows around $68-71.

JNK Part 2

Linkable Real-time chart

It is not often I get to pat myself on the back, so I will take that rare opportunity now. The JNK and S&P 500 call in early April turned out to be spot on. The reason I bring it up is because right now it seems the disconnect is occurring again, except in the opposite direction.

Currently the S&P 500 looks extremely oversold compared to the JNK index. This is in contrast to early April where JNK was leading the markets lower. Today it seems JNK may be leading the markets higher. Please see the previous post on April 2nd for more information on the history of the two indices. JNK Part 1

The way to trade this is through a pairs trade. A pairs trade is similar to a hedge in which you initiate a long position as well as a short position with the hope of them converging. The beauty of a pairs trade is that it often lowers risk (since you are both long and short similar markets) as each entity acts a natural hedge of the other purchase.

Looking at the busy chart below, one can see the relationship between JNK and SPY in the middle graph.  It may be easiest to right click chart-->and open in a new tab to zoom in.  Most recently the disconnect between the two etfs is pretty apparent and what I am seeing as a potentially good pairs trade.  This is shown by the circles in the middle of the chart.  Also notice the 50 day correlations, usually hovering around 100 (other circles on the chart).  Today it seems that the junk bond market is not confirming the recent stock market weakness and can be viewed as being near term bullish stocks and/or bearish junk bonds.

In order to long the S&P500 and short the JNK, two etfs are readily available, the SPY (S&P 500) and the SJB (short junk bond). If one were to purchase both of these, an expectation of the stock market to rise and the Junk bond index to fall would occur. By purchasing these two etfs together one may be able to take advantage of the expected convergence and re-emergence of the high correlation of the two indices.  Once the convergence occurs a closing of both positions would lock in the trades and hopefully profits!  The risk is that the decoupling will now be permanent, and things indeed have changed, however, if thought rationally about the relationship between stocks and high yield debt, the debt prices should fall as equity prices fall and rise as equity prices rise as they both represent the same underlying companies.

Good Luck!