Technical Analysis and the FFFF Chart Formation

by JDH on August 27, 2011

Last week I discussed the insanity of the markets, although I did comment that with the markets down and gold up, they were appearing to return to a much more sane approach to the world.

This week, as we make our way, sadly, to the end of the Dog Days of Summer, the markets don’t know what to do. Perhaps it was the big storm in the north east earlier this week, or the earthquake, or the arrival of Hurricane Irene.

(As an aside, what’s up with all of this stuff? Is it really necessary to evacuate New York? I guess it is, but that seems like an over-reaction. I guess it’s better to be safe than sorry).

My take: we are still in a depression. If the Dow doesn’t get above 11,500 in relatively short order, the triangle gets broken to the downside, and we may, at that point see 10,000 or lower.

In a depression stocks go down, and that’s what’s happening, despite QE1, 2, and 3 (or whatever it was that Bennie said on Friday). That’s probably why the Dow is down 3.69% year to date, and the broader measures are down even more: The S&P 500 is down 9.3%, and the MCSI World Index is down 10.33%.

Gold stocks, on the other hand, are doing much better, thank you very much.

Here’s a senior gold producer, AEM.TO – Agnico-Eagle Mines Ltd.:

As I mentioned last week, the drop from $87.50 in December down to $52.50 this month was not fun. The bounce back up to Friday’s close at $67.37 has been much more enjoyable.

As you can see from the chart, we have now completed the always bullish FFFF Pattern, the Five Fingered Fan Formation. The Fingers of the Fan are drawn from the peak to each successive lower high. Once five fingers are drawn, the pattern is complete, and if the sixth high is higher than the fifth, the bear market is over, and the stock is due for a bounce, which is exactly what has happened this month.

Okay, I made all of that up. There is no such thing as an FFFF formation, but that’s what I love about technical analysis. You can see whatever patterns you want to see, and you can draw the lines however you want. Ultimately the world does not follow nice trading patterns. If it did, we would all be rich, but of course if we all followed the same pattern the pattern would no longer work.

(For a different take on technical analysis, read Martin Armstrong’s thoughts on gold. He published some thoughts this week, and he appeared to be worried about a correction. The bounce on Friday appears to relieve those concerns, but again, reading his ramblings doesn’t leave me more educated; they simply leave me scratching my head: Martin, next month, is gold going up or down? That’s really all we want to know).

The one obvious benefit of technical analysis is that we can see the obvious trend, like gold:

Obviously gold is on a run, and the drop this past week, when looking at an 18 month chart, is nothing more than a blip.

So why does the chart of AEM.TO – Agnico-Eagle Mines Ltd. look so much worse than the chart of gold? Obviously there are underlying company issues, but many gold stock charts look the same.

No matter. Ultimately the price of gold determines the value of gold stocks, so I believe that over the next few weeks and months it will be the stock’s turn to play catch up.

So here’s the plan:

I’ve put in stink bids on the stocks where I want to increase my holdings. I’ve done it as a ladder, so I’ve got some bids just below market, and more 10% and 20% and even 50% below market. If they get filled, great. If not, that means stocks are rising, so my holdings will do well. Either way I win.

Assuming the world survives Irene, we can discuss it more next week. Thanks for reading.

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