The Basics of Bollinger Bands

In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it. 

Unlike a percentage calculation from a normal moving average, Bollinger Bands simply add and subtract a standard deviation calculation.

Standard deviation is a mathematical formula that measures volatility, showing how the stock price can vary from its true value. By measuring price volatility, Bollinger Bands adjust themselves to market conditions. 

This is what makes them so handy for traders: they can find almost all of the price data needed between the two bands. Read on to find out how this indicator works, and how you can apply it to your trading.

Read more at:
https://www.investopedia.com/articles/technical/102201.asp

3 Charts Suggest Emerging Markets Downtrend Just Getting Started

"One of the most common sell signals used by active traders occurs when the 50-day moving average crosses below the 200-day moving average. 

This iconic breakdown is known by many as the death cross and is used to signal the beginning of a long-term downtrend. 

In the paragraphs below, we'll take a look at several charts suggesting that the emerging markets are in the early days of a major downtrend and that lower prices could be a consistent theme over the coming weeks or months."

Read more at:
https://www.investopedia.com/news/3-charts-suggest-emerging-markets-downtrend-just-getting-started/

Should you invest in large-cap or mid-cap stocks?

The stock market has been in a down trend for more than a year – losing 25% from its Nov ‘10 peak. Experts suggest that such falls provide excellent opportunities to accumulate strong large-cap stocks. Large-cap stocks are less risky and offer steady rather than spectacular returns.

Most small investors have a penchant for seeking out small and mid-cap stocks in the hope of making multi-bagger returns. But high returns are usually accompanied by high risks. What should small investors do? How to contain risk without missing out on returns?

In this month’s guest post, Nishit looks at the pros and cons, and comes up with an alternative approach.

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The argument will always continue whether to invest in large-cap or mid-cap stocks. One of my friends was asking me this morning whether it would be a good idea to invest in mid-cap IT stocks. It was the trigger for this post.

Mid-caps have several advantages. They are the real multi-baggers. Microsoft and Infosys were mid-caps once upon a time. Mid-caps can be a 10-bagger or even a 100-bagger. Mid-cap stocks carry a greater amount of risk as compared to large-cap stocks. In a bear market, a large-cap may lose 50% of its value whereas a mid-cap can lose as much as 90-95% of its value.

So, how does one address this conundrum? Every portfolio needs to be garnished by a sprinkling of mid-cap stocks, just like our food needs a sprinkling of salt to add to the taste. Just as too salty food is not good for health or taste, too many mid-caps is not good for the health of your portfolio, which leans towards risk.

How does one identify good mid-cap stocks? There are several criteria one must keep in mind.

1. They should have sound business models.
2. They should be generating real profits.
3. They should have good management. This is a very tricky question. How does one see a management to be good? A small investor cannot go and meet the management of a company he likes. One must look through the annual reports and notifications of the stock exchanges. The promoters should not have a shady reputation, or indulge in activities that harm shareholders – such as pledging of shares or dazzling announcements aimed at TV and newspapers.
4. The companies should be generating positive cash flows and providing steady dividends. Steady dividends can be ignored if the business is growing and the promoters are not investing the money in unrelated activities.

Now that we have looked at what criteria to use in selecting a good mid-cap company, the next question is when to invest. In bear markets, mid-caps are battered beyond recognition. Hence, one can follow this strategy. Keep accumulating large-cap stocks on every dip.

For mid-caps, buy only if the Nifty sustains above its 200 day Moving Average for a week or more. 200 day Moving Average is considered the dividing line between bear and bull markets.

Also, depending on one’s risk profile, the allocation has to be done between large-cap and mid-cap ideas. A conservative portfolio can have a 80:20 ratio between large and mid-caps. A more aggressive portfolio can have 60:40 ratio between large and mid-caps.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

Two weeks back, gold’s price was making a second attempt at a pullback towards its 200 day SMA from below. It was expected that the bears would resort to selling and push the price down once more. But after a bit of a struggle, the price crossed above the still-rising 200 day SMA and has stayed above it since then.

Technically, the support at 1550 was not broken – gold’s price only had a day’s close below the support level. So, the drop from 1900 to 1550 should be treated as a bull market correction. The 30 day and 60 day SMAs (not shown in chart) did not fall below the 200 day SMA. Once the 14 day SMA crosses above the long-term moving average, the bulls will regain control.

Gold’s chart appears to be forming a bullish ‘falling wedge’ pattern, which is a ‘continuation’ pattern from which the likely break out should be upwards. Please remember that technical analysis is not a science, and patterns don’t always play out as expected. Buy on a convincing rise above 1700.

Silver Chart Pattern

Despite a smart pullback above the 14 day SMA, silver’s price is trading below its 30 day and 60 day SMAs (not shown in chart) and well below the 200 day SMA – the hallmark of a bear market.

The white metal is falling within a downward-sloping channel, making a bearish pattern of lower tops and lower bottoms. The 200 day SMA is forming a ‘rounding top’ pattern, hinting at a further fall in silver’s price.

Gold and Silver Chart Patterns: pullback rallies

Gold Chart Pattern

Two weeks ago, the following comment was made about gold’s price chart: “A pullback to the long-term moving average was only to be expected, and has been in progress for the past three trading sessions.” Some times, price charts provide an ego boost to technical analysts by behaving exactly as per expectations. The pullback reached the still-rising 200 day SMA, only to encounter selling pressure and plummet to a close below the 1550 level.

The break down below the symmetrical triangle pattern and the pullback to the 200 day SMA were both selling opportunities. At the time of writing this post, another pullback attempt is in progress to prevent a bear market – but it may meet the same fate as the previous one. The 14 day SMA is about to drop below the 200 day SMA. A close below 1520 will confirm a bear market.

Technically, the support at 1550 hasn’t been convincingly breached yet because gold’s price jumped up after a single day’s close below 1550. There is stronger support between 1450 and 1480, if 1550 does get breached eventually. Can gold’s price fall even lower? Anything is possible once the bears get the upper hand – and the technical signals are looking ominous for bulls.

Silver Chart Pattern

There are no doubts about bear domination of silver’s chart pattern. The white metal dropped to a new closing low of 26 for a day before embarking on a sharp pullback. The 14 day SMA (as well as the 30 day and 60 day SMAs – not shown in the chart) is falling below the 200 day SMA and silver’s price is trading below both SMAs – the sign of a bear market.

Stay away till trend-reversal signals become visible.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

In a post two weeks back, the possibility of a break below the symmetrical triangle pattern on gold’s price chart had been mentioned, even though gold was trading way above its rising 200 day SMA. A downward target of 1450 was also mentioned. Such huge drops – from 1750 to 1450 - don’t happen in one shot. But the drop of 150 within two weeks must have shaken the confidence of die-hard gold bulls.

A swift and steep drop below the 200 day SMA stopped just short of the support level of 1550 (where multiple tops were formed in May and Jun ‘11). A pullback to the long-term moving average was only to be expected, and has been in progress for the past three trading sessions.

The 14 day SMA is falling towards, and may soon drop below, the 200 day SMA. That will be the first warning of a likely change of the bull trend. The 30 day and the 60 day SMAs – not shown in chart above – are also falling. Note that the ‘panic bottom’ of 1600 – formed in Sep ‘11 – has been broken. Panic bottoms seldom hold.

The break down below the triangle was a selling opportunity. So is the current pullback. Long-term holders who may have entered at lower levels can stay invested with a stop-loss at 1550.

Silver Chart Pattern

The 200 day SMA has just about started to fall as silver’s price is moving down towards the lower edge of its downward channel. All the three moving averages – 14 day (in chart above), 30 day and 60 day SMAs – have crossed below the 200 day SMA, with silver’s price trading below all four.

Silver is in a bear market, and can fall to much lower levels. Looks like ‘game over’ for the bulls.

Gold and Silver Chart Patterns: consolidating

Gold Chart Pattern

Gold’s chart has been consolidating within a symmetrical triangle pattern (in yellow) for the past 10 weeks or so, and is ripe for a break out of the triangle. In which direction? Knowing the answer can make some one seriously rich! Triangles are quite unreliable and the break out can occur in either direction.

On an upward break out – which should be accompanied by heavy volumes for the break out to be valid – gold’s price can reach 2000. On a downward break, the price can fall to 1450. There is a third possibility. Gold’s price can continue to consolidate and move sideways through the apex of the triangle (at around 1725). In the latter case, the triangle pattern would fail.

Since gold’s price chart is in a bull market – it is trading well above its rising 200 day SMA – an upward break out has greater probability. But technically, the chart is showing some weakness. Note that the recent rally faced resistance from the 1750 level and failed to reach the upper edge of the triangle. That may be a prelude to a break below the triangle.

Await the break out before taking a decision to buy or sell.

Silver Chart Pattern

Ever since the steep drop below the 200 day SMA about 10 weeks back, silver’s price has been in a sideways consolidation between 28 and 36. The 200 day SMA is beginning to flatten out and should start falling – confirming a bear market.

In my previous post, I had mentioned that silver’s price has been trading within a downward-sloping channel (in yellow). The trend is down, and will remain so till the upper end of the channel is convincingly breached. With manufacturing activities contracting in Europe and the emerging markets, there is little likelihood of a boost in silver’s price any time soon.

Stay away till clarity emerges about a resolution of the Eurozone debt problems.

Gold and Silver Chart Patterns: an update

A few months of correction, and all the chatter about a return to the gold standard and the dollar no longer being a reserve currency is off the table! The signs of revival seen on the chart patterns of gold and silver two weeks back proved to be illusory.

Both precious metals are now trading below their 14 day, 30 day and 60 day SMAs, and may drop down to test their Sep ‘11 lows. Will that provide a buying opportunity?

Gold Chart Pattern

The answer should be ‘Yes’ for gold, because it is trading well above a rising 200 day SMA and is in a bull market. Note that the 1750 level provided good support till gold’s price chart formed a small ‘double-top’ reversal pattern and suddenly dived on Thu. Nov 17 ‘11.

A test of the 1600 support level is on the cards. The support should hold since the 200 day EMA is also near 1600. Just in case 1600 gets broken – nothing is certain in technical analysis – 1530 should be a stronger support due to the multiple tops formed near that level during Apr – Jun ‘11.

The downside to a bounce up from 1600 is that a bearish ‘descending triangle’ will get formed, from which gold’s price may fall all the way to 1300. This is a hypothetical possibility as of now, so no need to be alarmed. Let the chart pattern unfold. But it may be prudent not to be gung-ho bullish about buying the likely bounce up from 1600.

Silver Chart Pattern

The answer to the question is ‘Not yet’ for silver, because the white metal and all three of its moving averages (only the 14 day SMA is shown on the chart) are trading below the 200 day SMA – which indicates a bear market. The Sep ‘11 low of 28 may be tested and broken.

Note that silver’s price was consolidating within a small symmetrical triangle formed near the support level of 34, before breaking down sharply on Thu. Nov 17 ‘11. Drawing lines through tops formed in Apr ‘11 and Aug ‘11, and bottoms formed in May ‘11 and Sep ‘11 will form a broad downward-sloping channel pattern with its lower end currently at 26. That is a level which provided support in Nov ‘10 and Jan ‘11 – so an upward bounce can be expected from 26.

Bravehearts may try to bottom-fish at 26. Conservative investors should buy only on a convincing break out above the downward-sloping channel.

Gold and Silver Chart Patterns: rallies reviving?

The sharp corrections seen on gold and silver chart patterns appear to be over, and the bull rallies are all set to resume. Gold’s price never dropped below the 200 day SMA, so technically it was just a bull market correction following a double-top reversal pattern. Silver’s price dropped below the 200 day SMA and has stayed below the long-term moving average for more than a month, raising the spectre of a bear market. However, there are signs of revival of late.

Gold Chart Pattern

Gold’s price is trading above its 14 day, 30 day, 60 day and 200 day SMAs, and all four moving averages are rising – which is the sign of a bull market. More importantly, the price has climbed above the 1750 level – the ‘valley’ level between the two tops at 1900.

Note that the 1750 level acted as a resistance during the recent up move, and once the resistance was overcome, the resistance level has turned into a support level. Gold’s price should start moving up towards its previous top of 1900, and eventually test and overcome the 1900 level to touch a new high.

A satisfactory resolution of the Eurozone debt problems may cause a renewed interest in risky assets and slow down the up move in gold’s price. But the bull market in gold is very much alive, and price dips can be used to add.

Silver Chart Pattern

Silver’s price is on a gradual recovery path, though it is still trading below the 200 day SMA. The fact that the white metal is trading above its 14 day and 30 day SMAs, and the 200 day SMA has started rising again point to a revival of interest in buying silver.

Intrepid investors can start accumulating slowly at current prices. The more prudent action will be to wait for a convincing cross above the 200 day SMA before buying. As with all purchases, a strict stop-loss should be maintained – say, at 32.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

Gold’s price had formed a double-top reversal pattern after touching 1900. The double-top was confirmed when the price dropped below the ‘valley’ level 1750 between the two tops. Downward target of 1600 was achieved quickly on gold’s chart, after which gold’s price has been consolidating within an upward-sloping ‘wedge’ pattern.

Most consolidation patterns tend to be continuation patterns. That means, the trend before entering the pattern – down, in this case – would continue once price break out happens. Unlike triangle and rectangle patterns, from which break outs can happen in either direction, the rising wedge is fairly dependable. It forms during bear phases, and the price break out is downwards.

Bulls may feel enthused that gold’s price is trading above the 14 day SMA, and the 200 day SMA is still rising – indicating that the bull market is far from over. But the possibility of a break below the rising wedge pattern, and a test of support from the 200 day SMA should induce caution.

Existing holders can keep a stop-loss at 1540 (the level of the 200 day SMA) and continue to hold. New entrants can wait for a likely upward bounce from the 200 day to accumulate. (Note: At the time of writing this post, gold’s price has dropped sharply to 1630, indicating a break below the rising wedge.)

Silver Chart Pattern

After dropping like a brick below the 200 day SMA, silver’s price has been consolidating within a symmetrical triangle. Though silver’s price is trading above the 14 day SMA – a short-term positive – the longer-term outlook is not bullish.

The 30 day SMA (not shown in chart above) has slipped below the 200 day SMA, and the 60 day SMA is likely to follow suit. The 200 day SMA is flattening and may turn downwards soon. Silver’s price is in a clear down trend, marked by lower tops and lower bottoms. Downside targets are 24 and 20. Wait for the correction to play out.

Gold and Silver Chart Patterns: end of long bull rallies?

Gold Chart Pattern

In an update to gold’s chart pattern two weeks ago, the following conclusion was drawn:

‘The present correction/consolidation – whatever it may turn out to be – should restore the technical health of gold’s chart for the next up move.’

The expected drop to 1600 from the double-top at 1900 happened quickly, and gold’s price has been consolidating in a narrow range of $50 since then. It is beginning to look like the next up move may take a while, and gold’s price may dip further – possibly to the 200 day SMA (at about 1520) - before a sustained rise can begin again.

Note that the 200 day SMA is still rising, with gold’s price trading above the long-term moving average. Technically, gold is still in a bull market. But extreme caution is advised about entering at this stage – since the yellow metal is trading below its 14 day, 30 day and 60 day SMAs. All three are likely to act as resistances on any up moves. Not to forget the valley level of 1750 (between the two tops at 1900), which should provide strong resistance to a price rally.

A fall below the 200 day SMA will also mean a 20% drop from its peak, and a likely trend reversal from bull to bear. If you are still holding and in profit, maintain a strict stop-loss at 1520.

Silver Chart Pattern

There are no doubts about the state of silver’s price chart pattern – it is in a bear market. It has dropped more than 20% from its peak and is trading below the 200 day SMA. The 14 day SMA has slipped below the long-term moving average. The 30 day and the 60 day SMAs have turned down and may cross below the 200 day SMA in the near future.

Why is silver faring worse than gold? The answer probably lies in the fact that silver is not something you just buy and lock up in a bank vault. It has several industrial uses as well. With global manufacturing in clear de-growth, industrial demand for silver is declining. (The fall in copper prices are also due to this same reason.)

If you are still holding, use any price rise to exit. On the down side, the next supports are at 24 and 20.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

On a closing basis, gold’s chart appears to be forming a bearish ‘double-top’ reversal pattern, with two tops at 1900. The ‘double-top’ will get confirmed only on a drop below the ‘valley’ between the two tops. That means a drop below 1750. At the time of writing this post, gold’s price is at 1780.

In case of a convincing drop below 1750, gold’s price can move down to 1600. There is also the likelihood of a bounce up from the 1750 level, in which case the ‘double-top’ will be negated and instead, a rectangular consolidation pattern will get formed.

Gold’s price is still trading way above its 200 day moving average (not shown on chart), which means the bull market is very much intact. The present correction/consolidation – whatever it may turn out to be – should restore the technical health of gold’s chart for the next up move.

Silver Chart Pattern

Silver’s price chart hasn’t made much headway since my previous post two weeks back. A slightly lower top at 43.50 has been followed by a steady slide below the 40 mark. Looks like the price is headed down towards the support level of 38.

That level coincides with that of the 60 day MA (not shown in chart), so silver’s price is likely to bounce up and provide an entry opportunity. A break below 38 should find good support from the rising 200 day moving average - currently at 35.

Gold and Silver Chart Patterns: up, up and away?

In an update of the technical chart patterns of gold and silver posted two weeks back, I had mentioned about the possibility of a sharp correction in gold’s price due to the extremely overbought condition, and advised investors to use the dip to buy. Silver’s price was expected to pull back a bit after a quick rise above the 14 day SMA, and provide a good buying opportunity.

Gold Chart Pattern

A sharp correction was expected – and what a sharp correction it was! Gold’s price was shaved off by almost $200 in the space of two days of trading. The 14 day SMA was easily breached and the price headed down towards the 30 day SMA. The bounce back was equally sharp.

Before the overbought condition could be properly rectified, gold’s price shot up above the $1900 mark. The volatility continues in today’s trading. Price touched a new peak of $1920, only to correct by more than $50 within a couple of hours! At the time of writing this post, gold’s price seems to be stabilising around $1900.

Such volatility is a sign of growing uncertainty, probably caused by the bleak outlook of the US and Eurozone economies. Uncertainty usually precedes a correction. That doesn’t mean that gold’s price may not rise some more. But one should be very cautious about entering near all-time highs – regardless of what you may hear or read.

Technically, the ever widening distance between the 14 day SMA as well as the 30 day SMA (not shown in the chart above) and the 200 day SMA is a harbinger of a big price meltdown. If you are invested in gold, maintain a strict stop-loss at 1820 – which is the level of the 14 day SMA.

Regular readers know that I am not a fan of buying gold because it provides no returns. If you are interested about a view based on historical analysis of gold and stock investment performance, read this article.

Silver Chart Pattern

Silver’s price chart shows a short and sharp correction, from $44 to $40, and a quick dip below the 14 day SMA. A pull back to $42 was expected. It provided a good entry opportunity. The quick recovery did not affect the upward momentum of the 14 day SMA or the 200 day SMA. The bull market in silver is intact, which is confirmed by the bullish pattern of rising tops and rising bottoms.

During today’s trading, silver’s price faced a sharp $2 drop before stabilising near the $42.50 mark. Technically, there isn’t any immediate threat of a big price correction. Dips can be used to accumulate. A convincing move above $49 will restore control to the bulls.

Gold and Silver Chart Patterns: an update

There is an old stock market saying: When in doubt, stay out. But in current politically and economically turbulent times, investors appear to have created a new maxim: When in doubt, buy gold (and silver).

Gold Chart Pattern

Gold is being bought as if the financial world is going to collapse tomorrow, or latest by next week. What else can explain a vertical $200 surge from 1700 to 1900 in the two weeks since my previous post?

Admittedly, there is sovereign gold buying, and Venezuela created a flutter by planning to repatriate $11 Billion worth of gold held in overseas banks. The sorry state of Eurozone banks is a major concern. But ask yourself: Is the global economy in a worse situation than it was in 2009?

One can debate the state of the global economy till the cows come home. The bottomline is that the parabolic rise in gold’s price over the past couple of months is unsustainable. The chart is looking extremely overbought, with the 14 day SMA (as well as the 30 day and 60 day SMAs – not shown in the chart above) climbing away from the rising 200 day SMA. A sharp correction, if not a crash, is around the corner.

If you are an investor who would rather buy gold (instead of Colgate or ITC shares), use the likely dip to buy gold ETFs. My preference is for the hefty dividends that Colgate and ITC shareholders receive – not to forget the occasional bonus shares.

Silver Chart Pattern

After a four month lull, during which silver’s price went through a decent correction, prices have risen sharply to touch the 44 mark. I had recommended that investors use the recent dip to buy, or to wait till the 42 level is crossed convincingly.

If you missed out on the buying opportunities, wait for a likely pullback towards 42 to enter. The 14 day SMA is turning upwards. The 200 day SMA didn’t stop rising right through the four months of price correction. The bull market in silver is alive and well.

Gold and Silver Chart Patterns: divergent directions

In my previous update of gold and silver chart patterns, both precious metals had bullish upward breakouts. Gold broke out from a rectangular consolidation pattern to touch the 1600 mark. Silver broke out from a symmetrical triangle pattern to reach the 40 level. However prices have taken divergent routes in the past three weeks.

Gold Chart Pattern

Gold’s price had risen almost vertically to the 1600 level, and I had expected a pullback to 1550 (the top of the rectangular pattern). The price did dip, but only to 1580, before resuming its rally. It has once again climbed almost vertically past its 14 day, 30 day, 60 day and 200 day SMAs to 1717 and is looking overbought.

The debt ceiling wrangle followed by S&P’s downgrade of US credit rating has caused a flight of safety to the yellow metal. According to data from the Commodity Futures Trading Commission, gold purchases leaped to more than 18 million ounces over the past month - from 8.4 million for the entire year up to July. Is it too late for investors to enter now?

Yes and no. No, if you believe the US and Eurozone economies will take a long time to recover, and the US dollar will continue to lose its value. Yes, if you think stock prices have come down to reasonable valuations can provide better percentage returns in the long-term.

If you are paralysed by fear because of the sudden, sharp fall in global equity markets, hold on to your cash. You are not in the correct mental frame to take rational buy/sell decisions. If gold forms only 5-10% of your portfolio allocation, past three week’s rise in price coupled with the fall in equities has probably pushed your gold allocation above the limit. Book part profits. If you are a new entrant enticed by the prolonged bull rally, wait for a dip below the 14 day SMA to buy.

Silver Chart Pattern

Silver’s sharp price rise was followed by a sideways consolidation during which it touched a high of 42 but slipped below the 14 day SMA to a low of 39. It is struggling to cross above the 14 day SMA, and may correct some more.

The dip may be used to buy. Conservative investors can wait for a convincing cross above the 42 level. The rising 200 day SMA indicates that the bull market is intact.

Gold and Silver Chart Patterns: an update

The chart patterns of gold and silver have made significant bullish breakouts since my earlier post two weeks back. As often happens with bullish breakouts, investor interest has risen proportionately. I received quite a few queries whether this is a good time to enter.

Gold Chart Pattern

Gold’s price rose almost vertically to pierce the psychological 1600 mark intra-day. I had mentioned about the price consolidation within a rectangle between 1480 and 1550, from which an upward breakout was likely. Accordingly, buying on a breakout above the 1550 level was advised.

Note that gold’s price spurt has been too fast. It has risen far away from its 14 day, 30 day, 60 day, and 200 day SMAs. A pullback towards the 1550 level is a possibility. That may be a better price point to enter.

Silver Chart Pattern

Silver’s price was consolidating within a symmetrical triangle from which an expected downward break did occur. But the 34 level provided good support. The previous low of 32.50 wasn’t tested.

The bulls managed a spirited recovery that took silver’s price above the 14 day, 30 day and 60 day SMAs – as well as the 40 mark. The rise has been a bit steep, and a dip down to 38 is possible. The dip can be a good point to enter.

Till the growth uncertainties in the Eurozone and US economies recede, the precious metals will continue to be safe havens for jittery investors.

Gold and Silver Chart Patterns: trying to find bottoms

Gold Chart Pattern

In the previous post, I had mentioned about a possible bullish ascending triangle pattern formation on gold’s chart - from which an upward break out was likely. Ascending triangles tend to be fairly reliable. But not so this time. An attempted upward break out was thwarted by the bears.

Selling pressure pushed down gold’s price below its 14 day and 30 day SMAs. However, the previous low of 1480, touched in May ‘11, seems to be providing support. If the support holds, gold’s price will form a rectangular consolidation pattern – within 1480 and 1550. Rectangles  are usually continuation patterns – which means an upward break out is likely.

What should investors do? The earlier suggestion stands: buy on a break out above 1550. An analyst friend, whose bold views I admire, believes that gold’s price can double by the end of 2011 – because current demand is far outstripping supply. Apparently, a detailed report by Standard Chartered has echoed his bullish views.

Caveat Emptor. 

Silver Chart Pattern

Silver’s chart pattern had been consolidating within a symmetrical triangle, after dropping from its peak of 48.70. Symmetrical triangles tend to be continuation patterns, and I had expected a downward break below the triangle, followed by a test of support from the rising 200 day SMA.

Silver’s price did break below the triangle, but is trying to find a bottom at the support level of 34. Will the support hold? May be not. A test of the previous low of 32.50 and the 200 day SMA can’t be ruled out yet.

The white metal is trading below its 14 day, 30 day and 60 day SMAs after making a series of lower tops and lower bottoms. The short-term and medium-term views are bearish. Bulls should not lose heart – as long as silver trades above its rising 200 day SMA.

Gold and Silver Chart Patterns: an update

In my previous post on Gold and Silver Chart Patterns, I had mentioned about a pair-trading opportunity. Going through that post, I realised that instead of recommending 'long gold, short silver', I had written the exact opposite.

For any one who had read through the entire post, it would have been clear that I was bullish about the gold chart and bearish about the silver chart. However, as a penance for the error, I'm going to refrain from making any more trading recommendations.

Gold Chart Pattern 

Gold's price dipped below the rising 14 day SMA, but was well supported by the 30 day SMA. By Fri. Jun 17 '11, gold's price managed to close above the 14 day SMA - indicating that investors are using all dips to buy.

As long as the recent high of 1565.70 - touched in Apr '11 - is not surpassed, the bears will try to make life difficult for the bulls. But may not be for long. A bullish ascending triangle appears to be forming on the gold chart, from which a likely upward break out can easily take gold's price past the 1600 mark.

Stay invested with a trailing stop-loss. Buy on a break out above 1550.

Silver Chart Pattern 

Silver's price chart continues its consolidation within a symmetrical triangle, and is now trading below the 14 day, 30 day and 60 day SMAs. Triangles tend to be unreliable, but are usually continuation patterns. Since silver's price entered the triangle from above, it is likely to break below the triangle and test support from the still rising 200 day SMA.
Buy if there is a sharp upward bounce from the 200 day SMA.

Gold & Silver Chart Patterns: pair trading opportunity?

Regular readers of this blog know that I’m not a great fan of investing in precious metals. Neither do I trade for the short-term, nor do I recommend that small investors should indulge in trading. But sometimes an opportunity stares you in the face – as the one year gold and silver closing chart patterns seem to be doing now.

Gold Chart Pattern

The technical headwinds that the gold chart was facing last month led to a decent correction below the 14 day SMA. Such corrections restore the health of the bull market and provide good entry points.

Isn’t gold’s price near an all-time high, and shouldn’t one be cautious? The current investor interest in gold has been largely due to the weaknesses in the dollar and the euro. The currency weaknesses aren’t going away any time soon. Gold’s bull market is likely to test and surpass its recent peak of 1565.70.

But it is a good idea to be careful – more so because gold’s price and its 14 day SMA have both risen far away from the rising 200 day SMA. A deeper correction may be around the corner. Stay invested with a trailing stop-loss.

Silver Chart Pattern

The technical headwinds turned into a full-blown hurricane in silver’s chart pattern. A 33% correction from the peak of 48.70 to a trough of 32.50 has shaken off the speculators.

Silver’s price has been consolidating within a triangle pattern and has edged above the 14 day SMA, but remains below the falling 30 day SMA. The possibility of a breakdown below the previous low and a test of support from the rising 200 day SMA can’t be ruled out.

The pair trade? Long silver, short gold. But remember – I have no skin in this game!

Why technical and fundamental analysis are the two feet of a stock portfolio

Have you tried to stand on one foot for any length of time? Unless you are an expert in hathayoga, you won’t be able to do it for more than a few minutes. Even if you are able to balance yourself for 10 minutes on one foot, what purpose will be served? You won’t get anywhere! Like you, your stock portfolio needs to use two feet – technical analysis and fundamental analysis – to achieve success.

Being an engineer by training, technical analysis always appealed to me more when I started investing in the stock market. Semi-logarithmic charts, trend lines, symmetrical and right-angled triangles, rectangles, parallelograms, Fibonacci retracement levels were familiar terminology. I took to them like a duck to water.

Well, not quite. After losing a ton of money, I came to the fairly simple conclusion that familiarity with the terminology was not the same as knowledge of the subject matter. Understanding different chart patterns is not of any use unless you know which stock charts to study. But the alternative wasn’t intellectually stimulating enough.

Fundamental analysis meant dissecting the contents of Annual Reports. No exponentials or double integrals to apply one’s math skills. Just a bunch of numbers that needed to be added and subtracted and divided to unravel the secrets of well-disguised financial performances. Low-level clerical stuff – or so I thought.

Finally, a broker friend opened my eyes. He only had a B. Com degree but was rolling in cash and driving around in new cars. So I asked him what the secret was. His answer shook me up. Just plain grunt work, he said. Wading through annual reports to find financially strong companies that generate cash and don’t require too much capital to function.

How do you decide when to buy or sell?, was my next question. This is where a bit of knowledge of technical analysis can help, he responded. You have to first determine the trend – whether up, down or sideways. Moving average crossovers and support-resistance levels can then be used to determine entry and exit points.

That is all there is to it. No rocket science. Just school-level arithmetic, including familiarity with graphs and the discipline to go through annual reports in detail. Don’t have time and energy for all this hard work? Avoid individual stocks; buy mutual funds.

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