Thursday, February 2, 2012

Is Volatility Coming Back?

Via Peter Tchir of TF Market Advisors,

VIX continues to remain low, but intraday (or intranight) volatility appears to be making a comeback. That is volatility in the true sense of moves up and down (I’m not sure when volatility came to mean ‘stocks went down’).

Chinese PMI is supposedly one of the reasons that futures are up, yet, that seems to be a bad explanation, since futures went from an Amazon induced low of 1306, up to 1311 on the PMI news, but then drifted lower and were at 1304 by the time Europe got up and running. It has been a relentless march higher since then as it went to 1320. It’s not quite like last year where multiple 10 point moves were the norm, but we have had a few 0.5% moves up and down overnight already. Yesterday we hit a high of 1315 while Europe was in charge, hit 1302 once the US data was revealed, and clawed back to 1310 for a variety of reasons (month end, amazon and psi expectations chief among them). Again, nothing like last year?s intraday vol, but starting to provide some significant moves that will make risk management a challenge again.

Main isn’t really volatile, it just goes tighter every day. There was a brief attempt to open it wider this morning, as some courageous (or poorly informed) traders made it 143 bid. It has been hit like a piƱata since then and got as tight 139 offered. It is giving back a touch as the US opens (the opposite trend of last year). It has almost gotten to the point I’m scared to answer the phone since it will be my mother asking if I’m long Main yet? For the record, by the time she knows what the obvious trade is, it’s over.

The correlation of stocks and Euro hasn’t been as strong as it was last year, though it seems to be returning. In any case, the intraday vol there is also picking up.

This isn’t as wild as last year, but a grind to 1.32 followed by a drop to 1.30 followed by a spike back to 1.32 isn’t exactly quiet and tame.

These moves are occurring on fairly light volume. So as hedge funds and other asset managers get themselves positioned, volatility is increasing. Volumes remain low. Street liquidity remains very low. I don’t see any reason for this trend to reverse itself, and think higher levels of intraday volatility are on the way. Is it time to buy some options to capture this?

Long or short, it looks like trading some options could make sense as some timely ‘delta’ rebalancing could be very effective and the implied volatility you are paying seems reasonable. Longer dated vol has not dropped as much as short dated vol, so another reason to look at this trade.

Stocks On Fire In 2012: IBN, LYB, RBS, SLT, SPY

Overall, stocks have been pushing higher in early 2012, with the S&P 500 SPDR (NYSE:SPY) ETF up 3% from $127.50 to $131.32. Yet, some stocks have been exploding. The following foreign stocks, all listed on the NYSE, have been on fire in 2012, up more than 25% so far.

Royal Bank of Scotland (NYSE:RBS) is up 27.38% this year, from $6.61 to $8.42. The stocks has been recovering after hitting a multi-year low at $5.36 in November of 2011. Since January 19, 2012 the stock has been trading between $8 and $9, unable to reach either level. A breakout from this range it likely to be a significant factor in the long-term direction of the stock. Overhead resistance is at $9.15 - the October 2011 high. If the price pushes through that resistance level there is little resistance until $10 followed by $11. On-balance volume is rising which is a positive and should continue to rise if the price moves higher. A drop below $8 on the other hand is a warning signal that the stocks could slide back to lower levels.

Sterlite Industries (NYSE:SLT) is up 26.56% in 2012, from $7.23 to $9.15. Like RBS the stock hit a multi-year low in 2011 at $6.64 and has been recovering since. The recent recovery has broken the downtrend which was in place since mid-2011, but the stock is struggling to break through resistance at $10. If $10 is broken to the upside the target is $11.50. $8.50 to $8 is the support area based on a gap up which occurred on January 17, 2012. A drop back into that support area - especially below $8 - is bearish, but if the stock can hold support and push through resistance the stock could recover much of its 2011 losses. On-balance volume is rising, and is a positive for the stock price.

Lyondellbassell Industries (NYSE:LYB) is up 28.77% this year, from $33.47 to $43.10. The move higher has already cleared many of the resistance levels in its path. Still overhead though is $45 followed by the 2011 high at $48.12 (on an dividend adjusted basis the stock has already cleared these levels). While the stock is currently in over-bought territory, on-balance volume is moving aggressively higher confirming that buyers are willing to put their money on the line. With the stock recently breaking through resistance at $42 it now likely the high at $48.12 will be tested. A move through there should test the psychologically important $50 level. Support has developed just above $38.50 and a drop below this level is an early warning signal. There is also upward sloping trendline support at $37, drop below this level warns of a potential reversal.

Icici Bank (NYSE:IBN) lost more than half its value between July and December of 2011, but is up 28.63% from $28.15 to $36.21 in 2012. Heavy resistance lies overhead at $40, which is the level to watch. A rise above $40 could trigger buying into $45. The stock traded in a range between $45 and $50 in mid-2011 which should now act as least initially. The rally higher this year has been aggressive but the stock put in a recent low at $33.85 (hammer candle) on January 30. If the price continues to push higher in early February, threating to break the $40 level, this low can be used as a stop loss level. The stock remains in an uptrend as long as the price stays above $32.75, a drop below signals a potential reversal.

The Bottom Line
As the overall market has pushed slightly higher in 2012, some stocks have exploded. RBS, SLT, LYB and IBN are all up more than 25% year-to-date. The on-balance volume indicator shows strong buying interest in these stocks, and if resistance is broken these stocks could continue to make big gains. There is resistance overhead though, and risk should be properly managed. With the aggressive run-ups these stocks have seen pullbacks are always a possibility so support levels and trendlines can be used to control risk and set stop levels.

Alf Field Predicts $ 158 as Next Target for Silver

by Alf Field,


I have received numerous emails asking about silver. This article was prompted by a question enquiring what the silver price might be if my gold forecast of $4,500 proved to be correct. As I own some silver bullion and a number of silver mining shares, the question caused me to pause and take a closer look at silver.

The reason why I have written very little about silver in the past was because the beautiful Elliott Wave (EW) symmetry and predictable relationships visible in gold were not to be found in silver. I first wrote about silver in December 2003 in an article titled “US Dollar Implosion – Part II”. The link to this article is at: The brief piece on silver was tacked onto the end of that article. In view of its brevity, the 2003 silver piece is reproduced in full below:

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Junior Gold Stocks Rebound from Lows

The junior sector had a very difficult year in 2011 but has led the recent recovery (at least statistically) in the precious metals sector. Two of our favorite exchange traded funds, GDXJ and are up 30% and 25% respectively. That exceeds GDX (large caps) which has rebounded 15%. These are significant gains but barely put a dent in the low valuations for the sector. Ratio analysis shows us how undervalued the smaller gold stocks are yet an examination of history shows this is not out of the ordinary at this point in a bull market.

First lets take a technical look at the juniors. We show and GDXJ in the chart below. is a Canadian junior ETF which is comprised of entirely gold companies while three of the top ten companies in GDXJ are silver companies. ZJG is nearing resistance at 20-21 while GDXJ is nearing resistance at 31-33. More importantly, both markets have broken out of their downtrends against Gold.

Next we show a plot of our junior gold index (call it JGI), GLD and a ratio of JGI against GLD. Note that the ratio, which peaked at 0.7 in 2007, is currently at 0.4. JGI is presently at 66. Should Gold eventually break to new highs and JGI/GLD rise back to 0.7, then junior gold stocks would gain more than 100%. With large producers reporting record cash flow and profits, it is only a matter of time before all gold equities reach higher valuations against Gold itself.

Our Junior Gold index as well as the other junior indices do not include the “true junior” companies which are of the microcap variety. The CDNX is basically an index for these types of companies. Most but not all of the companies within the CDNX are gold and silver related. Thus, in the chart below we decided to compare the CDNX to the CCI (continuous commodity index). The CCI is somewhat close to an all-time high while the ratio of the junior companies to the CCI is close to multi-year lows. With commodities not far off all time highs, one would expect the junior companies to be trading at higher levels.

Lately we’ve been writing about how gold stocks are faring in comparison to previous equity bull markets. The comparison argues that gold stocks should fare well this year and well into 2013. Even though this bull market is in its 12th year, it remains a few years away from the start of a bubble. In a bubble, valuations expand far beyond fundamentals and it continues for several years. In order for this to happen, valuations must be low prior to the start of the bubble.

From early 1992 to 1995 the price to earnings ratio (PE) on the Nasdaq fell from 50 down to 20. Over the next two years, the PE ratio climbed from 20 back to 50. Then in the second half of 1997, the PE ratio surged past 50 and never looked back.

From 1973 to 1983, the PE on the Nikkei (Japan) ranged from mostly 15 to 23. After 1983, the PE ratio surged to new highs and eventually peaked at 70.

It is clear that prior to a market bubble, valuations are compelling. Not stretched or fair, but compelling. After all, a bubble needs time to develop and then have its final blowoff stage. Prior to the start, valuations begin to move from the low side to the high side. Then as the bubble really gets going valuations break to new records and surge to extremes.

Months ago we wrote about how the PE for large cap gold stocks was near a 10 year low. Now we see that the speculative side of the precious metals sector, (the juniors), is trading at near basement valuations. This is 12 years into a bull market. Not five or eight. It will take time for valuations of precious metals companies to move back to the high end of the range. Companies that grow their business and add value could perform fantastically thanks to a likely increase in the valuation of the sector.

Jordan Roy-Byrne, CMT

This Must-Buy Big Name Is on Sale Stanley Black & Decker is solid, growing strongly -- and a bargain

Some of the world’s greatest investments are often sitting right under your nose. While rummaging through my garage the other day, I came across a hammer. I know what you’re thinking: I’m going to talk about Home Depot (NYSE:HD). Nope, I’m going one better. Home Depot has to shell out a lot of money to build and maintain these stores.

Instead, I’m going to talk about a company whose name requires Home Depot to stock its products. That name is Stanley Black & Decker (NYSE:SWK).

The company offers products and services across hand tools, power tools and accessories, construction tools of all kinds, industrial and automotive repair gear, engineered fastening systems, infrastructure solutions, mechanical security systems and even health care. Chances are you’ve got a Black & Decker something in your house somewhere.

This is exactly the kind of company that’s easy to overlook when thinking of investments. Yet it makes things that are essential to everyday life and that you can find on store shelves around the world.

I expected Stanley Black & Decker to be in the stalwart category — an 8% to 10% earnings per share grower, with a solid balance sheet and a little dividend. Turns out it’s a serious growth stock, which also has a solid balance sheet and a little dividend. Analysts see 15% earnings growth in 2012, and 14% next year, with an 18% annualized rate over the next five years. This is a gigantic leap in earnings following a 50% pop in fiscal 2011, which came on the heels of consecutive years of declining net income. Can you say “economically sensitive”?

But that’s also what’s so great about hopping into companies like this as the economy turns. Although growing at an 18% clip going forward, it trades at only 12x fiscal 2012 earnings. That gives it a price-earnings to growth (PEG) ratio of 0.66, making it also a serious value play (a PEG of 1.0 is considered fairly valued).

And yes, the balance sheet looks good: $851 million in cash offset by $2.74 billion in debt, which is costing the company only about 5% annually in interest expense. Free cash flow was $560 million over the trailing 12 months, which is about twice what Stanley Black & Decker needed to pay the 2.3% dividend. The company said it expects to double that in fiscal 2012.

It’s also instructive to take apart last week’s earnings report. Total revenues were up 17% in Q4, much of it from acquisitions, but there was 7% organic growth in the industrial segment. Asia grew 12% for the quarter and 18% for the year. All this provides yet more evidence that cyclicals are coming back. I just wrote about railroads[3], which are seeing an uptick in shipments of raw and finished goods.

Now’s the time to keep an eye out for stocks in this sector. You want to be in on cyclicals at the start of the new economic cycle, but also be aware that unexpected headwinds could slow growth.

Greece Warns It Will Soon Be In “Condition Of Absolute Poverty”

from ZeroHedge:

And while the bankers (on both sides of the table) haggle about how to best leech Greece even dryer (with a solution due any hour, day, week now), the actual people are starting to wave the white flag of surrender. Because the opportunity cost of every additional coupon payment is having a direct, immediate and increasingly more dire impact on virtually every aspect of the economy. Kathimerini reports that “about 160,000 jobs will be lost this year in the commerce sector, according to the National Confederation of Greek Commerce (ESEE) as the constant decline in disposable income has led to a sharp drop in turnover and a steep rise in the number of enterprises shutting down.” Indicatively, the latest Greek employment figures per the IMF, show that 4.156MM people are employed. So commerce alone is about to lead to a 4% drop in total jobs. As the chart below shows, net of just this sector, Greek jobs are about to go back to 2010 levels. What this means for the Greek unemployment rate, and for GDP we leave to our readers, although the ESEE does a good job of summarizing what to expect: the “ESEE warns that soon Greece will be in a condition of absolute poverty.” And that, ladies and gents, is how Europe slowly but surely reentered the Feudal age, and what every other country in the European periphery that has a massive debt load, and no surplus (actually make that every country in the world), has to look forward to: absolute poverty, aka debt slavery.

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Outlook for Gold, Equities and Earnings, and USD – Borthwick, Merk, Gartman, Ortel

Bill Gross: Investment Outlook (February 2012)

Life – and Death Proposition

by William H. Gross, PIMCO

  • ​ Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.
  • Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.
  • We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.

​Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember
Virginia Woolf, “The Hours”

I don’t remember much of this life, and like Virginia Woolf, nothing of the herebefore. How then, could I expect to know of the hereafter? I know at least that we all exist at and of the moment and that we make up those moments as we go along. I became a grandfather for the first time a few months ago and proud son Jeff asked for some fatherly advice as to how to go about raising his baby daughter Caroline. “We all do it in our own way, Jeff, you’ll make it up as you go along,” I said. Parenting, and life itself, is one giant experiment. From those first infant steps, to adolescent peer testing, flying from and departing the parental nest, gene replication and family building of our own, maturity and acquiescence, aging, decay and inevitable death – we experiment as best we can and make it up as we go along.

That death part though, oh where do we go after we have done all the making? There was another Jeff in our family, beloved brother-in-law Jeff Stubban who was as kind a man as there ever could be. Dying within three months of an initial diagnosis of pancreatic cancer, our family sobbed uncontrollably at his bedside as his breath, his spirit, his soul, departed almost on cue while a priest recited the rosary. Where had he gone, where is he now, what will become of him and all of us? Like many grieving families we look for signs of him and in turn for clues to our own destination. A lucky penny in the street, a random mention of his beloved New Orleans, an exterior resemblance of his shiny bald head in a mingling crowd. Where are you, Jeff? Tell us you are safe so that we might meet again.

Having now matured to trust reason more than faith I offer not so much a resolution, but an alternative to the unanswerable question of Virginia Woolf and the departed souls of Jeff Stubban and billions of others. If we don’t meet again – up there – then perhaps we’ll meet once more – down here. After all, the one thing I know for sure is that we got here once – and because we did, we could do it again. Rest easy, dear Jeff, and welcome to this world, dear Caroline. We’ll all just have to make it up as we go along.

The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just that – nominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector.

Yet the imagination and management of the transition ushers forth a plethora of disparate policy solutions. Most observers, however, would agree that monetary and fiscal excesses carry with them explicit costs. Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his “QE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.”

My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences. Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.

It is instructive to mention that this is not necessarily PIMCO’s view alone. Chairman Bernanke and Fed staff members have been sniffin’ this trail like the good hound dogs they are for some time now. In addition, Credit Suisse, in their “2012 Global Outlook,” devoted considerable pages to specifics of zero-based money with commonsensical historical comparisons to Japan over the past decade or so. The following pages of this Outlook will do the same. At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.

What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”

When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.”

Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

Chart of the Day - TransDigm Group (TDG)

The "Chart of the Day" is TransDigm Group (TDG), which showed up on Tuesday's Barchart "All Time High" list. TransDigm on Tuesday posted a new all-time high of $105.10 and closed up 2.32%. TrendSpotter has been Long since Jan 23 at $101.11. In recent news on the stock, TransDigm on Jan 21 announced a definitive agreement to purchase AmSafe Global Holdings for about $750 million in cash. Wedbush on Jan 18 downgraded TransDigm to Neutral from Outperform and reduced its target to $98 from $108 due to the analyst's belief of limited upside growth in commercial aftermarket growth in 2012. RBC Capital on Jan 3 downgraded TranDigm to Outperform from a Top Pick with a target of $110 due to the firm's new policy of allowing only one Top Pick per analyst. TransDigm Group, with a market cap of $5 billion, is a leading global supplier of highly engineered components for use on nearly all commercial and military aircraft in service today.


Steve Quayle & Chris Duane: Silver and the New Paradigm

Steve Quayle and Chris Duane have an in-depth discussion of all things Silver, and discuss post-Dollar Collapse paradigm shift possibilities .Chris Duane outlines his thoughts on the future of America and the World.The Silver Shield, Chris Duane, of the website and founder of the Sons of Liberty Academy.Trade in your slave currency for gold/silver and take it out of their hands permanently. If enough people do it, we won't have to clash with stormtroopers in the streets. "In the land of the blind, the one eyed man is kind." All we need to do is take the one eyed man's eye out.

Golden Cross

Technical analysts define the “Golden Cross” as the chart feature that occurs when a security's short-term moving average (such as the 50-day simple moving average) breaks above its long-term moving average (such as the 200-day simple moving average) or resistance level.

Long term indicators carry are considered to have more weight, so crossing the longer-term average by short-term average price line is a significant indicator of a change in momentum. The Golden Cross indicates a bull trend may be starting and is confirmed by higher trading volume. The long-term moving average becomes the new support level in the rising market after a Golden Cross.

The S&P 500 index is approaching a Golden Cross now. If it happens, some analysts will forecast a new bull market for stocks. And they will have the numbers on their side.

The S&P 500 has produced 16 “golden crosses” since 1962, 75 percent of which were followed by positive returns in the next six months, with gains averaging 4.4 percent, according to historical studies. There were 26 instances in the past 50 years when the S&P 500’s short-term average crossed above the long-term measure. The data show the index rose 81 percent of the time with an average increase of 6.6 percent in the next six months.

We can also see the Golden Cross in the great bull market for gold. The last occurrence of the 50/200 crossover can only be seen on the monthly basis chart. It occurred back in 2005. Since then, the price of gold on the spot market has moved up from $348/oz to $1734oz today, a 398% percent increase.

Investors who spotted the start of the great bull market in gold early on have done very well.

But what about now? Is there more profit to be had in gold and the precious metals going forward? Can I determine the best time to enter the market? I say yes, and we can use the Golden Cross concept to pinpoint profitable trading opportunities.

Here’s how. We use technical analysis tools which are based on momentum, the best of which, in my opinion, is Ichimoku Kinko Hyo combined with MACD. The Ichimoku Kinko Hyo is a well established technical trading system developed by Goichi Hosoda in the 1930’s. Today, it is used by almost every securities trader in Japan, Asia and a growing number in Europe and North America. The indicator can be found on most trading platforms. Ichimoku Kino Hyo translates from Japanese to mean “one glance equilibrium chart”. It gives the analyst, at once, the trend and momentum of the market, and a good forecast of future price action, as if he could see everything at an instant.

The key to Ichimoku Kinko Hyo is crossovers. That is, four of the five components that comprise the system are comprised of short-term and long-term moving averages. Two establish support and resistance levels and are represented by the “cloud”, or moku. Two others (Tenkan Sen and Kijun Sen) establish trend. The fifth component, known as the Chikou Span, is not an average, but measures momentum.

Like the Golden Cross, crossovers by Ichimoku Kinko Hyo indicators signal changes in momentum. But the Ichimoku Kinko Hyo indicators provide much more information than the cross by a short-term simple moving average and a longer-term simple moving average. Ichimoku Kinko Hyo provides valuable trading information. It can tell the speculator when to enter the market with the best chance for profit.

So let’s examine the case for gold using Ichimoku Kinko Hyo and its trading discipline.

A look at the daily spot gold chart with 50/200-day moving average indicators shows no Golden Cross events over the last year. Also, support and resistance levels are not evident. Price action suggests the long-term trend is bullish, but more recent price action shows some consolidation. There is little information here to support a decision to trade.

Now let’s see what Ichimoku Kinko Hyo says about spot gold.

There is much more information here. To the uninitiated, it may seem confusing. But to the skilled trader, it provides almost everything needed for profitable trading.

Here’s what I see from this single chart. There have been two high probability buy signals and one high probability sell signal over the last four months for spot gold. These correspond to crossovers of the Tenkan Sen (blue line) and the Kijun Sen (red line) moving averages. The trading rule is momentum turns bullish when the Tenkan Sen crosses the Kijun Sen from below.

We can see this buy signal with a bullish crossover on October 26th and another on January 17th.

Likewise, momentum turns bearish when the Tenkan Sen crosses the Kijun Sen from above. This sell signal occurred on November 29th.

High probability trading requires confirmation by other indictors. Ichimoku Kinko Hyo provides these by the Chikou Span (green line), and price action in relation to support and resistance levels, displayed by the cloud, or “moku” (shaded areas of the chart). There are trading rules associated with each of the five Ichimoku indicators. Trading volume and the MACD are two separate indicators that support the decision to trade. We can see that crossovers of the MACD tend to lead Ichimoku crossovers. The aggressive trader can act on MACD crossovers for timing trades. The conservative trader will use Ichimoku to trade into the meat of a momentum move.

Using the technical trading tools Ichimoku Kinko Hyo and MACD has produced excellent results in trading gold, silver and other commodities. These are golden crossovers that work.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

By Scott Silva