Its
mid afternoon Tuesday and the markets are selling off – still. It
seems like it will never end. Big red candles on every chart I look.
The VIX, the temperature gauge of fear, is rising again and the news
headlines are filled with gut wrenching uncertainties about US Municipals,
foreign countries that are characterized as ticking time bombs and opinion
that we are headed for another Great Depression.
With
that backdrop, how about we ponder some charts and see if this market
correction is likely to stay with us for infinity and beyond or if perhaps it
has not only worn out its welcome, but is also close to having its flame
extinguished.
Let’s
begin with the SP-500 hourly chart. I made this chart online at the
website www.FreeStockCharts.com. The indicator displayed below price is the
True Strength Index, commonly referred to as the TSI. It is an
elegantly smooth and responsive momentum indicator.
First
off, we’ll note that both the SP-500 and the TSI indicator have a trend
line of lower highs connected by a white line. The TSI trend line spans
the entire 11 days of the SP-500 correction from 1131 to this moment.
The
exact midpoint of this SP-500 down leg is around 1,071 where we conveniently
find an open gap that is begging to be filled. Price today rallied up
to the white trend line and has since been repelled lower. It would be
easy to conclude, at this moment, that the stock market will continue to fall
apart except that the True Strength Index indicator is suggesting something
quite different.
The
white trend line of the TSI has already given a BUY signal – as it was
broken to the upside when price was just 1,017. Since early Friday, the
indicator of momentum has continued to rise and actually reached the ZERO
level before being turned down an hour or two ago.
When
the TSI indicator is rising ABOVE zero, price will absolutely be rising
simultaneously. That is how the indicator was designed to work.
As we are now very close to crossing the ZERO level, I take that as a
bullish sign.
The
other thing the True Strength Index is showing us is a favorable divergence.
The indicator is making higher lows while the SP-500 price is flat.
This indicates that a critical shift in momentum has occurred or is
about to occur.
Next,
let’s look at GLD and see if we can figure out if it is likely to
continue falling. This is a 30
minute chart of GLD.
We
notice that price is currently behaving in a manner curiously similar to a
multi-day patch of time beginning 8 sessions ago. There appear to be
two prior instances when a divergence of GLD price with respect to the True
Strength Index indicator preceded a run up in price. Perhaps the
current divergence in place signals a bottom, as before. The trend line
of the TSI has not yet broken out to the upside, so the jury is still out on
how this will be resolved. But the clues look very favorable for GLD
having bottomed today.
If
gold is about to bottom, or has already bottomed, one would think the miners
would somehow confirm that possibility – so let’s now take a look
at GDX to see what we can find.
I made
this chart online at www.stockcharts.com. On first blush, I saw those big red candles
and it was difficult to emotionally get excited about what I saw. Then
I thought it curious that the lows across the chart seemed rather
repetitive…..like maybe they were cycles, or something.
At StockCharts.com you can select ‘Annotate – Flash or
Java’ and then be able to use some interesting measurement and drawing
tools on the chart. I selected a tool that displays on the screen with
vertical lines and you pull the indicator left and right across the screen to
make the lines more or less frequent and therefore, closer or further apart.
Each line is equidistant from the other – and looks like a series
of blue parallel lines.
The
application for this tool, of course, is to explore whether a price chart
displays cyclical characteristics.
I
pulled the tool across the GDX chart, creating blue parallel lines equidistant
one from the other, and nearly could not believe my eyes. Plain as day,
there were the cycles of GDX. Sometimes a cycle bottoms a few days
early, sometimes a few days late. But after the cycle bottomed price
always exploded higher. Could it be that our recent horrible red
candles are occurring right on schedule and about to turn into white candles
exploding higher and higher?
I
invite you to visit my website at www.theTSItrader.blogspot.com. I
usually offer a few posts each day on my market observations, often comment
on the particular stocks I am currently trading, and try to show ways to use
the True Strength Index indicator to make some sense of where the precious
metals and their miners are heading. You may comment at my blog or contact
me at: TSItrader@gmail.com
Thank
you for reading my thoughts. I look forward to reading some of yours.
John Townsend
The
TSI Trader
John
Townsend invites you to visit his website at www.theTSItrader.blogspot.com. He usually offer a few
posts each day on his market observations, often comment on the
particular stocks he is currently trading, and tries to show ways to use the
True Strength Index indicator to make some sense of where the precious metals
and their miners are heading. Please do not hesitate to contact him.
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