Gold Stocks/Relative Strength

 

 

 

Trader Scott’s Market Blog

December 18, 2016

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Relative strength (RS), like most things in markets, took me way too long to really grasp, and specifically how to profitably implement in markets. It was a lot of trial and error. And there are different concepts behind it. There is the technical analysis indicator RS, which many people use. I don’t use it, although there would be validity to me in using it as a contrary “non-confirmation” indicator. Meaning, when RS gets deeply “oversold” and the market rallies from the lows and then goes to new lows but RS does not, then it’s a positive divergence – it’s just awkward for me to work with. Another way in which it’s used but doesn’t work for me, as pointed out in a previous post, is when gold stocks as a group are holding above the lows, but gold is going to lower lows. This shows gold stocks are showing RS to gold. That is true, but like so many things in markets, it is until it isn’t. And recently it was actually the opposite – the relative weakness in gold to the gold stocks – which concerned me. It’s really the intermediate or shorter term trend in gold which is the first step, and then use RS afterwards to employ, not RS first. That’s how I use it. In other words, if the intermediate/short term trend in gold is up, then the miners showing the best RS to gold are the ones I’m more interested in buying or holding on to. So when gold has a reaction (selling wave) in an uptrend, and has come down into a potential buy area, then those good RS stocks are the “better” buys. A few more examples – last December when gold was showing already tremendous strong handed buying pressure and then bottomed on December 17th, the gold stocks as a group did not bottom until January 19th. But that didn’t lead to new lows in gold. And more importantly, I had been much more interested in the individual stocks over the previous few months which had been showing RS to the rest of the gold group like the XAU index. You can see in the chart the XAU bottomed in January, but several individual miners had been showing life for several months before the January low. And more importantly for me, they did not go to new lows with gold on December 17th. And they did not go to new lows with the XAU in January. The difference between that situation then and now, is that I was getting increasingly bullish on gold from September to December (archived), as the strong hands were stepping up in a big way to outright buy gold, not just do short covering. So I had been making up a list of miners which were interesting me. I’m also focusing on three individual miners in particular now, but not remotely aggressively yet. These miners are showing RS to GDX, as it goes to new lows. But at this time, it still doesn’t mean as much until gold aggressively sets up. So last year (a stock which I didn’t buy then), but is a good example is AEM. As the XAU index was going to new lows, AEM had been continually showing resistance to falling. It was showing resilience/life, the upside pressure was taking over – it was sold out – and it was just waiting for a spark. In bottoming areas we need to look for a market, any market to begin showing life. It’s spry, it has a bounce in it’s step – it’s just bouncy. Those are characteristic of a bottom. Those are very subjective notions, but IMO they are much better than any technical indicator. Several posts have talked about my mentor during my floor trading days, we’ll call him SW. Well SW knew zero about technical indicators, Wyckoff, fundamentals, but he was one of the best pure traders I’ve ever been around. He had mastered his emotions, he had tremendous trading skills, but to this day he can’t tell me what his method was. And SW used to make these little priceless comments, and talking about how the personality of a market was changing was one of them. For instance, he’d tell me how the last several weeks a market had been trading heavy, but now it’s bouncy, the lows were seeing quality buyers step up. Well that is what AEM and some other miners were doing last year. That is the RS which matters the most to me. RS needs to be in context with the trend, with accumulation, with bottoms in the main market. And this concept is a great strategy for the general stock market also. When done well, it will minimize risk, and should bring better moves relative to the general market. And of course the reverse can be used when we may believe the stock market is “toppy”.

Last December (archived) I believed gold stocks were so bombed out it was fine to just buy the group, like GDX (which went below the December 17th lows after I bought), along with some individual miners (which stayed well above their December 17th lows). The bearishness, hatred, undervaluation, and set up were akin to the stock market in the Spring of 2009, or even more so, gold in the Summer of 1999. But even in these two instance it took patience before those markets kicked in. The S&P continued going to new lows into a final terminal shakeout on March 9, 2009. And look at gold – that massive bottom in which it eventually rallied almost 8x – it took about 18 months from the first low to the retest. And the retest barely stayed above the 1999 low. Once again, overcoming the day to day weirdness in markets (trading skills) is much more important than the method (analysis).

As to gold stocks currently, my focus is only on individual miners,not the group, as opposed to last year. The sentiment in PMs now is lousy, but that is definitely not a timing tool. It is a part of eventually putting in the low. People are slowly giving up on gold again. Retests, as the longer term charts show can be very trying.

 

About

img_0074bwcrsmTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.



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'Trader Scott’s Market Blog – Gold Stocks/Relative Strength – December 18, 2016' have 11 comments

  1. December 19, 2016 @ 12:24 am DAVID ZOMER

    Thanks Scott-good info to think about. Can you divulge which metal stocks are looking good to you now?

    Reply

    • December 19, 2016 @ 1:03 am traderscott

      Why don’t you send me an email David.

      Reply

  2. December 19, 2016 @ 10:50 am Adrian

    Scott,

    Is your focus on individual miners vs the group only temporary, for the short term rally and selling into strength?

    Reply

    • December 19, 2016 @ 11:39 am traderscott

      Adrian, right now short term, but that was my point, watching them and trading them with my eye on accumulating them for the next big gold bottom. And selling strength to use to buy weakness.

      Reply

      • December 19, 2016 @ 7:22 pm Jon

        The only problem is that strength is getting weaker this month. Holiday routine with position squaring into months/years end is like watching paint dry. Looking forward to January…

        Reply

      • December 19, 2016 @ 9:40 pm Adrian

        Thanks again Scott. What do you view of the COT at all? I put together these two charts with arrows and was curious on your opinion:

        1) http://image.prntscr.com/image/77ff92dde0d04510acd053fb7af19595.png

        2) http://image.prntscr.com/image/b6f4be577b2c4481b623bb8e70c48db2.png

        It would appear that “backing up the truck” when the large specs tend to pinch or go down vs the commercials… also measured alongside the BPGDM sentiment tracker.

        Just something I have noticed from my peon retail eyes :)

        Best,

        Reply

        • December 19, 2016 @ 11:11 pm traderscott

          Excellent work Adrian. If you don’t mind, I’ll include them in a post by tomorrow. I do follow the COT, but I don’t really use it as a main tool. There are people out there who use it as a main tool and that’s great. One problem I have with it is how some of the most important intraday trading, like last Wednesday and Thursday, won’t show up on the COT report until this Friday (if there is one this week). There will be more hedge fund selling showing up. But it does give a nice view of the big picture. For me it’s more of a background confirming view, like sentiment, not as a timing tool, per se. And it’s worth noting how they don’t do all of their buying/covering or selling/shorting all at once. They layer in and out. And they virtually always buy into weakness and sell into strength. And they don’t try to hit home runs. They view markets as inventory – to be sold when it’s higher, and bought when it’s lower. True professional approach. That is very important for all of us to recognize, I believe. Good work Adrian.

          Reply

          • December 20, 2016 @ 11:08 am Adrian

            Yep – feel free! SIlver’s COT’s are also quite similar – don’t go down nearly as far to the “pinch” however.

          • December 20, 2016 @ 11:51 am traderscott

            Great Adrian, and I replied to your insurance question, and also physical silver – gold and silver are showing some short term bounciness today, as the lows of the short term SOS are being tested.

  3. December 19, 2016 @ 10:23 pm Mark

    As a holder of NUGT, I sure hope for a reversal in the downtrend soon!

    Reply

    • December 19, 2016 @ 11:14 pm traderscott

      That sentiment is widely shared Mark. And it’s part of the big picture. Markets have rallies and reactions. Gold will too.

      Reply


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