Friday, September 25, 2009

So what works?

I needed to sit down yesterday and probably needed a good single malt scotch. Good thing it was still 10 am and even I have standards.

I am going to withhold the names but rest assured I am not claiming any credit here.
  • Gold rallies again to the grand mark and holds. Since I have never heard of a quadruple (or quintuple) top, this reeks of bullishness.
  • A colleague points out a giant inverse head-and-shoulders pattern. Again this is bullish but requires a breakout before we take action.
  • A gold stocks trader friend tells me all the signs are positive, from price action to Barrick Gold removing its hedges to the economy with the stimulus inevitably leading to inflation.

OK, back up the armored car. Let's buy!

Not so fast, Goldmember.
  • Gold COT shows small speculators at a huge net long while commercials at a huge net short.
  • Short-term gold cycle just peaked.
  • Gold does not go up over the past few weeks in a meaningful way given all the bad news, stimulus money and talk of leaving the dollar in the circular file as a world currency.
OK, cancel that buy order.

Then an insider in the gold business tosses in his two ounces.
  • Most of the real activity is done away from the exchanges and that means COT does not pick it up. The physical market is what counts.
OK, tape up that buy order and send it in.

The COT guy and the insider guy are like the irresistible force and the immovable object, they are that good. The rest of us are in a different league and caught in the epic battle between the two.

But wait, there is more! (quoted from "Off Kilter", a bagpipe led rock band in Disney World Canada pavilion)

A bearish one-day reversal on higher volume - like the one we had this week in the stock market - should be sold, right? That's what we are taught, at least those of us that took the time to get some actual chart reading training.

Nope. A few guys did some studies showing that on average the market was actually up over the next few days.

Wait a minute, a key outside-day reversal to the downside with heavy volume means the market will go up? Where is that single malt?

I really am having a hard time philosophically with all of this. What works? Is it nuts and bolts chart reading of trends? Patterns, breakouts, momentum, COT, you name it - are apparently all fluff these days. Breakdowns are fakeouts most of the time. Volume falls for six months as stocks rally 60%.

OK, I am done whining. Here is something possibly useful for those who read this entire post - the stock market is still in a rising trend. Breadth is still good. Rising trendlines are still intact. And for you fundamental types, the recent reversal pause and breakout in natural gas must be saying something positive. I don't care if it was a March 2009 stocks did not implode relief rally or a demand driven rise thanks to future economic activity, either.