Thursday, February 26, 2015

Technical Analysis Example: Gold

While my view of the US stock market is ridiculous overvaluation, the other views that I have are:
  1. Cheap precious metals
  2. Cheap Russian equities
  3. Expensive USD
I suppose a trade that capitalizes on both of these is buying Gold in USD, which is basically long Gold and short USD.

All my bias aside, I believe that we might be looking at a short-term bottom is Gold playing out now or very soon. (That would signal the same for Silver as well, given the high correlation of both the precious metals)

Using a combination of 2 leading indicators and 1 lagging indicator, below shows the chart of Gold that outlines how I use technical analysis. I have mentioned before that using some simple technical analysis is what helps me decide entry and exit points.


Once I see my leading indicators screaming oversold, I turn my attention to my lagging indicator and start looking for a crossover.

Leading indicators can remain oversold for long periods of time so when they start giving a signal, you might be entering too early. Lagging indicators only signal a change in trend once it has already happened, which means that you will always be late to catching the turning point.

However, I think using these indicators together can help identify and confirm future possible turning points. It is definitely not a perfect science, but I would wager that it is better than nothing.

I use other technical methods too, but I decided to clean up my chart to just show the simple example of how using leading and lagging indicators can be useful.

I really want to stress that I don't believe that you have to only follow Fundamental Analysis or Technical Analysis. They are not mutually exclusive school of thoughts. Why not use both if you can? No one is going to stop you.

To be very transparent, even though it looks like an attractive price, I already have very very rich allocation to precious metals, so I am resisting taking up additional positions. I've got to practise risk management and not bet the whole house, especially since I am trying to save up cash so that I can buy a house!

2 comments:

  1. Nice. I don't use indicators but totally agree with your views

    "While my view of the US stock market is ridiculous overvaluation, the other views that I have are:
    Cheap precious metals
    Cheap Russian equities
    Expensive USD"

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    Replies
    1. Hi Tiong Hum Soh,

      Any other extra big macro views you have to share? Brazil is starting to look pretty horrible actually, which sounds good to me! My bets on precious metals are quite big, so I would rather have a few more ideas to spread my bets and risk around!

      Delete

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