June 7th, 2012

When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)

My wife ran into my office yesterday and said that somebody on CNBC was saying that the market was making lower highs and higher lows and that, based on that “analysis” she said we should be either selling stock or buying some Ultrashort SPY ETFs.  I looked at my charts and I couldn’t see to what that “talking head” might be referring.  Or, to be more correct, I saw many situations on the S&P 500 chart to which the statement could be applied but it all depended on the time horizon, hourly, daily, weekly or monthly.

I saw another instance of this principle this morning when I clicked open a post by Corey Rosenbloom, well known for his internet go-to website dedicated to a technical approach to the market, Afraid to Trade, and frequent contributor to many other commentary sites like  Green Faucet.  In the ETF Daily News post, entitled “Watching Converging Trendlines in Gold“, Rosenbloom includes the following hourly intraday chart covering the period since December, 2011:

and  writes:

While there’s many other ways you can analyze the current Gold price chart, be sure to take into account this trendline convergence or overlap into the $1,630 area ….  That doesn’t mean price is required to reverse here – it’s just a key level on which to focus and plan short-term trades depending on whether trendline resistance holds (bearish if so) or breaks (bullish above $1,640 for confirmation) ….. A push/ breakthrough beyond $1,640 strongly suggests a Structural Reversal of the short-term trend, implying higher targets ($1,670, $1,700, etc) could be achieved in the context of a new intraday uptrend ….. The recent push above $1,600 locked in a “Higher High” which is the first step to a structural reversal).

My trading horizon is longer than that inferred in Rosenbloom’s strategy.  If precious metals is a good place to put my money in the hope of appreciation (the only form of return since precious metals don’t  pay dividends or interest) as an alternative to other opportunities then I want to make sure that the percentage gain will be significant.  I own a large number of stocks and, once I put precious metals (or any other stock for that matter) in my portfolio I don’t want to necessary have to make hourly or daily decisions as to whether it’s worthy of continuing it being held.  The only way of doing that is to focus on more elongated trendlines, longer waves and bigger swings.

That’s why included a longer term chart a month ago (updated to yesterday’s close), in “Buffett and Precious Metals

and wrote

Both charts [I'd also included a chart of silver] contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.

Rosenbloom looks at possible breakout from his “converging trendlines” and sees a move to the 1670-1700 (or, approximately, 167-170 in GLD) presumably over several weeks.  But then what is he going to do with this 4.3% move?  I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.

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