Opening Position
February 2006
With gold prices soaring over the $500 per troy ounce level, it is no wonder that the gold market has stolen the spotlight in recent days. What is unusual about this rally is that bond yields are still in check, which means that inflationary pressures are absent. Further, as far as risk is concerned, the current sentiment is that investors are willing to take risks. This was not the case in past gold rallies. To add to the mystery, we're seeing a strong US dollar, another atypical scenario. So the big question is: Will the gold rally sustain?
The one thing gold has going for it is strong demand, especially in countries such as China and India. It is likely that demand will continue and gold will still be priced at lofty levels. But as with everything, it's a matter of waiting and following that market. Those who rode the gold market, either through exchange traded funds, mutual funds, or futures contracts, would have done well for themselves if they had entered a long position in early November and stayed long till gold hit a peak in mid-December. This just goes to show that holding onto positions for longer than a day can have its benefits. Then again, how do you know that a tradable is going to rally for more than a month? Glad you asked. There are some indicators and chart patterns that can help you identify such moves, and we're offering a few articles that delve into the subject.
IN this, the February 2006 issue of Technical Analysis of STOCKS & COMMODITIES, the article "The Self-Adjusting RSI" by David Sepiashvilli discusses a different way of using the relative strength index (RSI) so that the overbought and oversold levels are more applicable across different parameters. Try it out and see if identifying the overbought and oversold levels is more accurate. Another important aspect that should not be forgotten is the use of stops. In "Sell Using Stops," starting on page 28, S&C Contributing Writer Thomas Bulkowski walks you through a trade he made, discussing his placement of stops. Find out how he uses chart patterns such as triangles and retracement levels to determine where to place stops. Another interesting chart pattern you can take advantage of is the cup with handle pattern. Giorgos Siligardos, in his article "Identifying The Cup" starting on page 36, discusses an algorithm he uses to identify such patterns.
With all these tools under your belt, you'll be ready to make position trades with confidence. So when the gold rally pulls back, you'll know it's time to exit. Good trading!
Jayanthi Gopalakrishnan,
Editor
Originally published in the February 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2006, Technical Analysis, Inc.
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