- Created on Wednesday, 16 February 2011 17:35
- Written by Sara Nunnally, Editor, Smart Investing Daily
- Hits: 3072
This week, I want to do something a little different than just run a guest article... I want to take apart a recent article from WaveStrength PowerSignal editor Adam Lass, with contributions from Jared.
Earlier this month, when gold prices were trading below $1,330, Adam released this chart of the Market Vectors Gold Miners ETF (GDX:NYSE).
Here's what he had to say...
The wags have been labeling the recent downward slide in gold prices as the end... a blow-off top... Gold Armageddon... yadda, yadda, yadda.
But when you take a look at the charts for Market Vectors Gold Miners ETF (GDX:NYSE), you can see that gold cyclically retraced within its price channel some 15 times over the past 24 months without challenging the integrity of that rising channel in any way, shape or form.
Right now we have the exact same stacked buy signals -- support at the bottom of the rising price channel, a Fibonacci retracement marker and the 200-day moving average, a shift to positive momentum and a positive MACD gap -- that have repeatedly yielded upside strokes averaging some 26%.
Now, 26% is a nice average, and Adam's chart is already starting to pan out. Since Feb. 4, when WaveStrength PowerSignal readers first got this chart in their inboxes, the GDX has climbed 2%. That means there's still plenty of upside left in this move, and you can find the exact recommendation online, available to all WPS subscribers.
Gold prices themselves have indeed moved higher and were trading back above $1,370 yesterday. This bounce higher is perfectly in line with what we've talked about here in Smart Investing Daily.
But let's take a closer look at those "stacked buy signals" that Adam talked about.
What are they, and what do they mean?
(By the way, investing doesn't have to be complicated. Sign up for Smart Investing Daily and let my fellow editor Jared Levy and I simplify the stock market for you with our easy-to-understand investment articles.)
Gold Miners ETF Finds Support
Adam talks about the Market Vectors Gold Miners ETF finding support at "the bottom of the rising price channel, a Fibonacci retracement marker and the 200-day moving average." This "node" of support is clearly marked on the chart, not only just before Adam's predicted movement for Market Vectors Gold Miners ETF over the next couple months, but in two other instances that both yielded results better than 25%.
These individual supports are powerful in and of themselves, but taken together mark the beginning of a big move higher.
Bottom of a Rising Price Channel -- When prices move higher within a channel, it represents the natural price corrections of the company or asset without significant changes to the fundamental value of that company. It's really just investors deciding if the company or asset is overbought or oversold.
So long as the asset makes higher highs and higher lows, the integrity of the channel remains strong; and when prices trade down to the bottom of that channel, it can signal a good time to buy.
Fibonacci Retracement Marker -- Many technical analysts use something called Fibonacci retracements. These are scales drawn on a specific -- and significant -- price movement... from a bottom to a top, or a top to a bottom. For Market Vectors Gold Miners ETF, the bottom started back in late 2008, and ends at the most recent top in late 2010.
This scale is measured from 100% at the bottom to 0% at the top (when using them on a rising price). The purpose is to find specific percentages of the price move that could provide support for prices during a price correction. Fibonacci retracements have four key markers: at 23.6%, at 38.2%, at 50% and at 62.8%.
Analysts who use Fibonacci retracements find that when prices correct from a high peak, these percentages offer points of support. The inverse is true when prices have fallen significantly... and the retracement markers become points of resistance.
200-Day Moving Average -- Moving averages show the average price of a stock or asset over a specific time frame. For the 200-day moving average, this shows the average price of the stock over the past 200 days. These averages kind of smooth out the price movements of a stock, which makes it easier for investors to see how much an asset really is moving. Moving averages, particularly when they survey a larger number of days, can be key indicators of support or resistance.
In Market Vectors Gold Miners ETF's case, prices climbed quickly between August 2010 and December 2010, which pushed prices farther away from the 200-day moving average. When prices corrected back down to that average, they found support.
Investors also use moving averages to gauge momentum. A rising 200-day moving average is more likely to provide support than a falling 200-day moving average, and Adam's mention of rising momentum as a specific indicator itself is another level of support.
The convergence of these support points is what Adam calls "stacked buy signals," because all have appeared to have halted the Market Vectors Gold Miners ETF's price decline.
These buy signals are then combined with another indicator: MACD.
Moving Average Convergence Divergence -- This indicator measures two separate moving averages as compared to a third moving average that functions as "zero." Sound confusing? It is, but it's worth understanding, as MACD can provide investors with key buy and sell points.
MACD compares a 26-day moving average to a 12-day moving average. Because of the difference in time frames, the 12-day moving average is more sensitive to price changes than the 26-day moving average. That means these two averages oscillate differently, and the changes in their relationship mean a lot.
These two moving averages are then overlaid on a nine-day moving average that becomes a signal line. Its value doesn't change. It essentially becomes zero -- just a way to compare the movement of the 26-day and 12-day averages to something static.
Those are the basics... Here's how to interpret those movements.
In general, when both moving averages cross above the signal line, it's a bullish signal. When they cross below, it's considered bearish. But the relationship between the two moving averages -- the convergence and divergence -- is even more important.
Because the 12-day moving average oscillates faster than the 26-day moving average, when the two meet or cross, it becomes a powerful indicator. When the 12-day moving average converges with the 26-day moving average, it could signal the end of a trend. When the 12-day diverges, it could signal a big price move is in the works.
With GDX, the 12-day moving average crossed above the 26-day moving average and was quickly moving higher. That means the immediate downtrend in GDX's prices was over and that investors could expect a big move higher.
That this divergence happened at the same time the GDX found support on three different levels with rising momentum is a huge indication that the Market Vectors Gold Miners ETF is headed north.
As I said before, the GDX has jumped 2% higher, but could climb as much as 26% higher. This move is just beginning, and Adam and Jared's recommendation on this move could realize even more gains. WaveStrength PowerSignal subscribers can immediately access this alert online.
And those interested in joining WaveStrength PowerSignal can learn more about Adam's options-trading service.
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