Donchian’s 5- and 20-day moving averages

Richard Donchian is known as the father of trend following. His original trend following ideas form the basis for all trend following success that has followed. Below in an excerpt from an article written in 1995 about his 5 and 20 day moving average system:

Title: Donchian’s five- and 20-day moving averages.
Author: Richard Donchian
Publication: Futures (Cedar Falls, Iowa) (Magazine/Journal)
Date: November 15, 1995
Publisher: Oster Communications, Inc.
Volume: v24 Issue: n13 Page: p32: ISSN: 0746-2468

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On Wall Street there are two conflicting adages:
1. “You’ll never go broke taking a profit.”

2. “Cut your losses short and let your profits ride.”

Experience has shown that in commodities trading, the first of these “old saws” is dangerous and misleading, while the second may well be regarded as the one lesson the inexperienced commodity trader should learn if he wishes to have a better-than-even chance to come out ahead.

Every well-designed, trend-following, loss-limiting method for trading in futures (or stocks) rests on the basic principle that a trend in either direction, once established, has a strong tendency to persist, at least for a time. Among the many trend-following approaches now in use are the Dow Theory, point-and-figure chart techniques, swing methods (other than the Dow Theory), trendline methods, weekly-rule methods and moving average methods. We’ll focus on moving average methods and, in particular, the comparatively simple five- and 20-day moving average method.

The Method
The rules for the five- and 20-day moving average method break down into two categories: general and supplemental.
General rules:

• 1. The extent of penetration of the moving average is broken into units, depending on price level. For commodities selling over 400 (wheat, soybeans, silver), for example, a penetration of 40 cents is required (Donchian had six price classes in the days before interest rates and stock index futures).
• 2. No closing penetration of the moving averages counts as a penetration at all unless it amounts to at least one full unit (39 cents in Rule 1 was not enough for penetration – it had to be 40 cents to count).
• Basic Rule A: Act on all closes that cross the 20-day moving average by an amount exceeding by one full unit the maximum penetration in the same direction on any one day on a preceding occasion (no matter how long ago) when the close was on the same side of the moving average. For example, if the last time the closing price of cotton was above the moving average it stayed above for one or more days, and the maximum amount above on any one of the days was 64 points, then when the closing price of cotton moves above the moving average, after having been lower in the interim, a buy signal is given only if it closes above the average by more than 64 points (the unit in cotton is 0.10). This principle – the requirement that a penetration of the moving average exceeds one or more previous penetrations – is a feature of the five- and 20-day method that distinguishes it from other moving average methods.
• Basic Rule B: Act on all closes that cross the 20-day moving average and close one full unit beyond (above or below, in the direction of the crossing) the previous 25 daily closes.
• Basic Rule C: Within the first 20 days after the first day of a crossing that leads to an action signal, reverse on any close that crosses the 20-day moving average and closes one full unit beyond (above or below) the previous 15 daily closes.
• Basic Rule D: Sensitive five-day moving average rules for closing out positions and for reinstating positions in the direction of the basic 20-day moving average trend are:
• 1. Close out positions when the commodity closes below the five-day moving average for long positions or above the five-day moving average for short positions by at least one full unit more than the greater of a) the previous penetration on the same side of the five-day moving average, or b) the maximum point of any previous penetration within the preceding 25 trading sessions. If the distance between the closing price and the 20-day moving average in the opposite direction to the Rule D close-out signal has been greater within the prior 15 days than the distance from the 20-day moving average in either direction within 60 previous sessions, do not act on Rule D close-out signals unless the penetration of the five-day average also exceeds by one unit the maximum distance both above and below the five-day average during the preceding 25 sessions.
• 2. After positions have been closed out by Rule D, reinstate positions in the direction of the basic trend a) when conditions in Rule D, point 1 above are fulfilled, b) if a new Rule A basic trend signal is given, or c) if new Rule B or Rule C signals in the direction of the basic trend are given by closing in new low or new high ground.
• 3. Penetrations of two units or less do not count as points to be exceeded by Rule D unless at least two consecutive closes were on the side of the penetration when the point to be exceeded was set up.

Supplementary General Rules

• 1. Action on all signals is deferred for one day except on Thursday and Friday, For example, if a basic buy signal is given for wheat at the close on Tuesday, action is taken at the opening on Thursday morning. The same one-day delay applies to Rule D close-out and reinstate signals.
• 2. For signals given at the close on Friday, action is taken at the opening on Monday.
• 3. For signals given at the close on Thursday (or the next to last trading day of the week), action is taken at the Friday (or weekend) close.
• 4. When there is a holiday in the middle of the week or a long weekend, signals given at the close of sessions prior to the holiday are treated as follows: a) for sell signals, use weekend rules; and b) for buy signals, defer action for one day, as is done on regular consecutive trading sessions.

A word of caution
The five- and 20-day moving average method, and most other trend-following methods, for that matter, are not good to follow unless you are prepared to include in your program a sufficient number of futures to provide broad diversification. Risks are increased to an inordinate degree if you try to follow the method in one or just a few selected contracts.

The commodities that are in a pronounced trend and are not giving, new signals are frequently the ones in which the best results are attained. Therefore, in starting a new program it might be advisable not to wait for new signals but to take positions in the direction of prevailing trends in those not giving new activation advice. Because the markets are moving so wildly, however, it might be best to a) go in the direction of the trend only after one or more days of counter-trend movement, plus a day move in the direction of the basic trend, and b) to use an arbitrary stop on positions taken without waiting for new signals.

Remember, five and 20 days are not necessarily the best lengths for moving averages. And, most probably, the action rules themselves, as outlined above, could be refined and improved. Also, it may be that exponential moving averages, weighted moving averages, moving averages based on highs or lows or daily means, or some combination of all these, would produce superior results.

In this field of technical study it is probably safe to state that the beginning of wisdom comes when you stop chasing rainbows and admit that no method is perfect. When you find yourself willing to settle for any comparatively simple method that in tests over a long period of time makes money on balance, then stick to the method devotedly, at least until you are sure you have discovered a better method.

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Richard Donchian worked at Shearson Lehman Bros. while developing his technical analysis and trend-following methods that today many traders use as the base of their systems. He also launched the first managed futures fund in 1948. Donchian died in 1993 at the age of 87.

S&P500 bounced off long-term support trendline - focus on 1121

it is very interesting to see yesterday's low in S&P has bounced off the long term Support line - I'd expect more risk taking and a test of the major 1121 level (50% fib 2007 top to 666 bottom).

EUR/USD --- 1:2.2 R/R trade idea

I entered long EUR/USD 1.4735 with 1.4681 stop for 1.4855 which fives 1:2.2 R/R ratio which is not great but here the other considerations:

Price managed to close 2 days inside the Bollinger Bands and today is shaping like a short legged doji - here is interesting that we have 3 scenarios to play this tight range day:

1 - it might produce acceleration of the prevailing trend - break of 1.4650 targets 1.4626 >> 1.4479

2 - we might have an expanded range day /Bullish engulfing in this case might be/

3 - we break 1.4759 for a test of 1.4855

here I picked the idea to bet on the 3-rd option because of the 89-day ma support and also the close inside the BBAnds often result in a counter move to the 21-Day /mid BB/.

Gold is sittign right on 34-day MA

I was interested to see Gold sitting right at its 34-Day MA (1120.06).

think its also on a previous Gap (1120) Support and it well worth for a spike to 1155 Gap resistance as marked on the chart.
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We have contracting range days in EUR/USD -- it has 3 consecutive days with minor higher lows right at 89-day MA - - this distribution of stops on OANDA' site actually supports a possible run to 1.4850 (55-day MA).. seems like short term bottoming pattern and the tighter ranges will sure has a break since tomorrow is Friday..

Ed Seykota on Trends

A trend is a general drift or tendency in a set of data. All measurements of trend involve taking a current reading and a historical reading and comparing them. If the current reading is higher than the historical reading, we have an up-trend. If lower, we have a down-trend. In the improbable event of an exact match, we have a sideways trend.

The direction of the trend depends upon the method we use to perform the comparison. Real instruments fluctuate minute-to-minute, day-to-day and year-to-year. We have, therefore an enormous supply of historical points to use to determine trend. As such, we can determine as many instances of trend as we please, in any direction that we please.

There is no such thing as the trend; there are countless trends, depending on the method we use to determine a trend. People typically pick a method for determining trend that fits with their current positions and/or view of the market.

All methods of defining trends compare various combinations of historical price points. All trends are historical, none are in the present. There is no way to determine the current trend, or even define what current trend might mean; we can only determine historical trends.

The only way to measure a now-trend (one entirely in the moment of now) would be to take two points, both in the now and compute their difference. Motion, velocity and trend do not exist in the now. They do not appear in snapshots. Trend does not exist in the now and the phrase, "the trend" has no inherent meaning. When we speak of trends, we are speaking, necessarily, from some or another view of history.

There is no such thing as a current trend. When we speak of trends we are necessarily projecting our own definitions.

Richard Hill on 80's trading day

Richard Hill on 80's trading day - part 1

http://www.youtube.com/watch?v=_jhKEBVE9zw

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Richard Hill on 80's trading day - part 2

http://www.youtube.com/watch?v=hhx-SM4kFEg

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Barclays 1989

http://www.youtube.com/watch?v=8kQZqzpmkFQ

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Barclays Lisoboa

http://www.youtube.com/watch?v=rt93xCclvdc

EUR/USD - sitting on this ice

I used this trendline technique that I used he actual bodies on the candlesticks and it is interesting that after the critical 270-pips slide in EUR/SD on Friday there was quite a shallow move today and it is hard to call this a good continuation signal.

One thing is for sure and that is the pivotal role of the 1.48 level which had been a great Support level since November. We are stuck still in the 1.48 --- 1.51 range and the trendline here actually gives a great buying opportunity signal witha stop below 1.48 - best 1.4740...

SPX (S&P500 Index) is tighening its range - get ready for next move!

Friday's move was accompanied by a high volume we haven't seen since September.

The current consolidation range is locked between 1080 and 1121 and looking at the contraction in the Bollinger Bands I'd look for a breakout move soon enough. Interesting is that there are 3 marginal higher highs ending with Friday last week. Today we didn't have significant test of the downside and Since start of November S&P has been trading above the pivotal 20-Day MA.

There is a slight divergence with the falling RSI and the rise in ATR is a sure sign for a pending rise in volatility. 1121 level is quite important as being 50% retracement level of the whole move into the 668 lows.

US Dollar Index (NYBOT:DX) spikes into reversal

While cautious to call a trend reversal, I'm observing a few technical points upon which I'm building an assumption a change in direction is most likely.

The US Dollar Index closed on Friday at 75.79 which is above the 50-Day MA (75.71) and also broke the long term Resistance trendline from the March '09 Highs. This goes along with a spike in RSI reading of 55.12 - first time since April and also a Buy signal from the Directional Movement indicator with the ADX pushing off the bottom to signal a possible acceleration of this counter trend move.

I'd like to see a continuation confirming the trend reversal with a possible first 76.85 November High and then the October High around 77.50. An intermediate term target would be set at the 200-Day MA now at 80.13.

10-Year US Treasury Price & Yield - Possible setting for reversal

The NFP data on Friday caused a sharp turnaround in 10-Year UST's price and yield right at the 50-Week MA levels. The positive media signals about the exit from the recession seems to converge right now with the sharp upsurge in 10-year yiled to 3.48 however as seen on the chart it is still caught in the 3.25 - 3.66 range. My take is we have seen a solid support which survived a second test this week at 3.22 and yield is going to challenge 3.66-70 levels where I'd expect to see some struggle at the consolidation channel top.

The Weekly candle shaped as a huge White Marubozu which is also a Bullish Engulfing pattern, closing the gap from 2 weeks ago. The whole structure of this consolidation might well be called a Bullish Flag that implies, if broken to the upside around 3.73, a continuation with first target - the 200-Week MA at 4.09.

The 10-Year note's price in he same time has he same technical workings in the moment as it bounced off the Resistance trendline at 121.17 and closed the gap from the 2 weeks before. I'm looking for continuation of this move down below 118 where the longer term trendline from the Dec '08 Highs and the Support Trendline converge around 117.

Gold - how about a top?

I waited for a long time to see some sign of reversal. Here are my points of assuming the Top is in place right now.

Friday's move close wiped out 2 weeks of ascent. The move since October formed an Ascending Broadening Wedge which if broken would give a target at $1025. The only problem right now is Friday's candle probed he T/L Support but closed right at the Line and also still above the 21-Day MA (1153,43).

RSI has already given Sell signal and ADX formed a top high above the DI- & DI+ which are now about to cross. According to Welles Wilder, who created those indicators, this formation with the ADX high above both the DI-&DI+ is a very good indication of a Trend reversal. There were 2 previous occurrences in September and October, however due to the strength of the trend they only yielded a shallow retraces.

Last take on the Reversal or at least the start of the Distribution phase is the rise in volatility. Average True Ranges are going through the roof to a year highs with 2 days of more than $60 range in last 2 weeks after we have been used to a $20 range. Watch it closely and go with the flow!

Ed Seykota!

"The biggest secret about success is that there isn't any big secret about it, or if there is, then it's a secret from me, too. The idea of searching for some secret for trading success misses the point."

"The 'doing' part of trading is simple. You just pick up the phone and place orders. The 'being ' part is a bit more subtle. It's like being an athlete. It's commitment and mission."- Ed Seykota

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I deeply believe that if one wants to learn a certain craft - he has to go for the best in the field.

Ed Seykota is a legendary futures trader and here I post his interview from Stocks & Commodities magazine:

Ed Seykota Of Technical Tools

Ed Seykota, whose thoughts and insights were chronicled in Jack Schwager's book Market Wizards, has been involved with trading commodities since the late 1960s. According to Market Wizards, Seykota's "model account" — an actual customer account — started with $5,000 in 1972 and to date has earned more than a 250,000% gain. Recently, in a new challenge, he purchased data and software vendor Technical Tools. S TOCKS & COMMODITIES Editor Thom Hartle interviewed Seykota in a series of written correspondence that took place over several months ending in May 1992, during which Hartle posed a number of questions relevant to all traders, including any secrets to trading successfully. Not too surprisingly, the answer to that was the same answer as for any endeavor — persistence and commitment!

How did you get started in technical analysis? What was your first trade?

The first trade I remember, I was about five years old in Portland, OR. My father gave me a gold-colored medallion, a sales promotion trinket. I traded it to a neighbor kid for five magnifying lenses. I felt as though I had participated in a rite of passage. I started early to get interested in technical analysis, too. By the time I was nine, I had a bedroom filled with old radios, test equipment and oscilloscopes. I liked to generate and display wave forms . Later, when I was 13, my father showed me how to buy stocks. He explained that I should buy when the price broke out of the top of a box and to sell when it broke out of the bottom. And that's how I got started.

With all that pointing you toward trading, was it inevitable that you would end up in it?

Actually, no. At the Massachusetts Institute of Technology (MIT), I studied servo theory, which is about self-controlling mechanisms such as thermostats, governors and chemical process controllers. Professor Jay Forrester showed me how to apply servo theory to economic modeling. His feedback dynamics approach required careful observation and deep thought about how things work.

So how did you get introduced to technical analysis?

About the time I graduated from MIT, I read an article by technician Richard Donchian that intrigued me. He demonstrated how a diversified simple five- and 20-day moving average crossover system made a respectable rate of return. That idea — the idea of an automatic mechanical moneymaking machine — fascinated me. So I bought some block time at a local computer service, spent my evenings punching up cards from The Wall Street Journal and began to reproduce Donchian's results. I tried varying the parameter sets and found that other combinations also worked. I noticed that longer-term smoothing worked pretty well, while transaction costs seemed to chop up shorter-term systems.

And then what did you do?

In the early 1970s, I went to work for a wire house. I would go in on weekends to use the IBM 360/65 accounting mainframe to run tests. I punched cards and ran batch jobs in FORTRAN 4. I managed to test four types of systems on about 50 different parameter sets on eight commodities going back a decade. It took me half a year. To show you how much computers have changed the way we do things, these days it might take one weekend on a PC.

So what did you do with that information?

Well, eventually, the management of the wire house packaged a product around my research. The problem was, my boss was unable to follow the system and his boss was more interested in souping up the system to generate more commissions. I told them their best move was to make money for their customers. No sale! Not only that, my boss reneged on his handshake that they would give me 10% of the commissions generated from the system. I got disgusted with them all and left. So at age 23, I went out on my own with about a half-dozen accounts in the $10,000-25,000 range. A few years later, I checked back with the boys at the wire house. They had hundreds of sales agents raising money for their souped-up rewrite of my system. I had more money under management than they did, and mine came from internal growth of my original accounts. I felt exonerated and glad I had escaped from a system based so heavily on commissions.

And since then?

I still test systems and think about the markets. I still collect data. I still manage money.

What is the secret to your success? What do you consider to be good mental skills for successful trading?

The biggest secret about success is that there isn't any big secret about it, or if there is, then it's a secret from me, too. The idea of searching for some secret for trading success misses the point. It's like golf. Some golfers play to spend time outdoors. They hang out with their cronies, become one with nature, study the greens, reconnect with their muscles, drop into focused concentration and, incidentally, pick up a birdie or two. For others, it's an exercise in finding some new Holy Grail putter. Different strokes for different folks!

In that case, what can an individual do to become a successful trader?

The "doing" part of trading is simple. You just pick up the phone and place orders. The "being" part is a bit more subtle. It's like being an athlete. It's commitment arid mission. To the committed, a world of support appears. All manner of unforeseen assistance materializes to support and propel the committed to meet grand destiny.

Should a person focus his or her time on developing mechanical or non-mechanical (judgmental) methods?

Judgmental systems are inherently mechanical. Gut traders trade according to set rules of attitude, approach and personality. But I also feel that mechanical systems are inherently judgmental. System traders typically use judgment for the enormously important tasks of rolling forward, changing bet size and adding or deleting instruments.

The point is, no real conflict exists between judgment and mechanical trading. A conscious trader is aware of money management algorithms, trading systems and the need for supportive relationships. He maintains his knowledge of broad and local economic trends and remains aware of his feelings. He is also aware of how his own personality works and creates a workable ecology between himself and the world around him.

If you don't use a mechanical trading system, have you built a set of rules to trade by? What are they?

I have many rules and some higher laws. Some of the rules are: Trade with the long-term trend. Cut your losses. Let your profits ride. Bet as much as you can handle and no more.

What do you mean by "higher laws"?

I feel that higher laws and rules govern much of my trading. There is a higher law that commitment and service favor performance. There is a higher law that greed and selfishness impede it. I feel I am in tune with these laws when things just seem to click. Other times I feel out of sync, as if I'm pushing a dull mower through tall wet grass.

Next to these higher laws, trading rules seem rather insignificant. Are price moves random? Is there any basis for trends? What makes prices move? С feel the "aha! " process lies at the heart of price change .

For instance, consider the series: OTTFFSSE. What is the next letter? This puzzle creates tension — until you see the first letters of the ordinal numbers — one, two. "Aha!" you say. A lot happens during an "aha." The puzzle dies and the tension dissipates. A societal "aha! " drives price. Read the newspapers and the news magazines during a major move. At first, no one gets why the move is happening. There's a lot of confusion. Part of the move's way up, some people get it. At the end, everybody gets it. The tension is resolved and the move ends.

Aha. I'll have to think about that. Can you tell us how you set stop-loss points?

Before I enter a trade, I set stops at a point at which the chart sours.

What about starting capital? How much money should a person have before starting to trade?

Good money management is equity invariant. I'd ask a trader who thinks he needs a certain amount before he can trade exactly what amount he would need to stop trading.

What are some of your favorite books that people should consider reading?

Through the years I have gained tremendous insight, perspective, skills, inspiration and strength from books. A short list of some of my favorite books about the markets would have to include Extraordinary Popular Delusions by Charles McKay; Reminiscences of a Stock Operator by Edwin LeFevre; and The Crowd by Gustare Le Bon.

Successful trading can be thought of as a business. Your new focus is running Technical Tools. Can you draw some co mparisons between trading and running a business?

Yes. I find a lot of similarities between trading and business. In trading, I have learned to ride the long-term trend, cut losses and manage money. In the case of Technical Tools, our customers, suppliers, competition and trade publications such as STOCKS & COMMODITIES indicate the long-term trend and help point to where we should be heading as a company in this industry. When I hire someone, it is usually on a trial basis until a strong "trend" of productivity sets in. Cutting losses in business has to do with discontinuing unprofitable products. Firing, also like cutting losses, is tough on the emotions and vital to the eventual success of all involved. Managing money means spending less than we make as well as not betting the ranch on just one idea. I find that the principles of sound trading have close analogs in running a business.

As Technical Tools develops I envision it as part of an enterprise in which trading and business converge. Lately, I have been beating the drum to call together a trading tribe, a kind of support group that borrows from tribal traditions as a means of cultivating group participation. Readers can write me in care of Technical Tools if they are interested in finding out more about this.

Running a business like a tribe sounds pretty unique. Thank you for your time, Ed.

You're welcome.

Richard Donchian - Trading Rules

Richard Donchian graduates from Yale with a BA in economics and begins his Wall Street career in 1930. From 1933-1935 he writes a technical market letter for Hemphill, Noyes & Co. For several years thereafter, he publishes a stock market service, "Security Pilot," and sells it to brokerage houses. During WW II he serves as an Air Force statistical control officer with a group they call the "Whiz Kids." For two years after the war, he acts as economic trend analyst and market letter writer for Shearson Hamill & Co. Quotes from his "Market Outlook" letters appear in the Wall Street Journal and other financial publications. He joins Hayden, Stone in 1960 and becomes VP and Director of Commodity Research. He writes numerous articles including "Trend Following Methods in Commodity Price Analysis." He publishes a weekly "Commodity Trend Timing" letter, based on his 5-20 moving average method and achieves a circulation of over 10.000.

Richard Donchian is the first to time trends and to use mechanical systems to manage funds. He might be called the father of trend-following. Here are more details on his biography:

http://www.turtletrader.com/trader-donchian.html

Here is an example of the successful traders from the early part of last century, as their focus is driven by Human Nature -- not current events or technological advancement. As such, they manage to uncover timeless truths about our unchanging natures -- and how these natures act and react in capital markets.

The following trading guidelines were first published in 1934:

Donchian's General Guides:

1. Beware of acting immediately on widespread public opinion. Even if it is correct, it will usually delay the move.

2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

3. Limit losses and ride profits, irrespective of all other rules.

4. Light commitments are advisable when a market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting, and concentration on these moves to the virtual exclusion of others will prevent unprofitable whipsawing.

5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, limit losses and take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.

7. In a market in which upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons; a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.

8. In taking a position, price orders are allowable. In closing a position, use "market" orders.

9. Buy strong-acting, strong-background commodities and sell weak ones subject to all other rules.

10. Moves in which rails lead or participate strongly are usually worth following more than moves in which rails lag.

11. A study of the capitalization of a company, the degree of activity of an issue and whether the issue is a lethargic truck horse like Consolidated Edison or a spirited, volatile race horse like Case Threshing Machine is fully as important as a study of statistical reports.

Donchian's Technical Guides:

1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction of the original move. Generally, when the second move from the sideways range has run its course, a countermove approaching the sideways range may be expected (Figure 1).

2. Reversal or resistance to a move is likely to be encountered on reaching levels at which the

commodity has fluctuated for a considerable length of time within a narrow range in the past or on

approaching previous highs or lows.

3. Watch for good buying or selling opportunities when trendlines are approached, especially on medium or dull volume. Be sure such a line has not been adhered to or hit too frequently.

4. Watch for "crawling along" or repeated bumping of minor or major trendlines and prepare to see such trendlines broken (Figure 2).

5. Breaking of minor trendlines counter to the major trend gives most other important position-taking

signals. Positions can be taken or reversed on stops at such places (Figure 3).

6. Triangles of either slope may mean either accumulation or distribution depending on other

considerations, although triangles are usually broken on the flat side.

7. Watch for volume climax, especially after a long move.

8. Don't count on gaps being closed unless you can distinguish among breakaway gaps, normal gaps and exhaustion gaps.

9. During a move, take or increase positions in the direction of the move at the market the morning

following any one-day reversal, however slight the reversal may be, especially if volume declines on

the reversal.

EXAMPLES:

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Gold in Parabolic trend

Gold managed to close higher for 4-th straight week just shy of $1200 mark.

ADX shows a solid strength in the move and trendlines support the assumption we are seeing the acceleration phase that will most likely result in a blow off top. I believe going with the trend is the best solution however I'm looking for early signs of topping. The sharp drop from 1194 to 1140 on Thursday, when Dubai news hit the market, in my opinion reveals the vulnerability of this relentless rise.

Already 15.5% above the previous top (1033) - Gold will have to deal with the psychological 1200 level. My first working scenario is a trend continuation. if next week we see aclose above 1200 I'd bet that we will witness even stronger buying frenzy and the acceleration might easily help the precious metal tp climb till 1220-30.

The other assumption would be that we don't touch 1200 and go straight down to 1145-25. While the RSI has been climbing steadily for the last 5 months we can see the indicator is topping and the ADX also adds similar implications as the +DI component already advanced to a new high. Fundamental themes and news flow will dominate next week as global markets will have to digest the Dubai status. That means more uncertainty and probably a lot more volatility. The Average True Range is rising which would be an early indicator for a possible start of the distribution phase characterized by high volatility and wide range trading until the distribution of the inventories is finished and the new trend ill begin,

10-Year US Treasury Note - Breakout higher is confirmed

Bond market is clearly showing signals for flight to safety.

I expect next week we see 121.50 - 122 levels exceeded. RSI is climbing steady and I expect the trend to accelerate as the ADX has bottomed already. The break of the Resistance Trend line around 119 - 3 weeks ago has been confirmed by 2 consecutive weekly new higher closes.

10-Year US Treasury Note on the Rise - Critical Resistance at 120.17/38

10-y US Treasury Note - Weekly chart: Price is close to probing the Upper Bollinger band at 120.17. Next important Resistanc ecomes in 120.38 - the 55-Week MA.

Price consolidates with upward bias inside a rough range between 117 - 120. I'm looking at the ATR indicator for further implications of change in Volatility. There is a solid trend of range contraction and we are on the level of the Average True Range we have seen in March and September 2008. Mu take on this picture is that ranges if falling below the current 1.66 range that would most likely signal trend continuation. 55-Week MA is acting as fulcrum axis pointing the trend. Given the convergence is pivotal 55-WMA and the Upper Bollinger Band around 120.17/38 my opinion is that we might see a further advance and expansion of the BBands which would fit in the trend breakout scenario.

The Dec '08 -> March '09 Highs Trendline has already been broken the Week before and last weeks higher high is acting as confirmation to this setup. RSI is supporting the upward momentum.

S&P 500 - momentum is fading

Weekly chart shows indecision represented by last weeks forming a tiny Doji with only a marginal new High. RSI & ADX both are losing steam.

I'm looking for first test of 1065-70 level and the critical 1025 below which the uptrend will signal retreat. Price is right at the middle of the Rising Wedge pattern so we need to watch for test of the Support or for a possible squeeze to new highs - the latter seems rather difficult to me.

Crude Oil (Nymex) - Triangle break & Critical Support at 75.80 (200-Week MA)

There are 2 technical scenarios to approach the present structure of the Crude Oil's trend. However the both rely on the Critical importance of the 200-Week MA at 75.80.

First and most obvious is the Ascending Triangle breakout above 75 that happened in October. The upside is coinciding nicely with the 200-Week MA and the measured target is around $91.

Second scenario is if the Trendline Support that comes in around 76 will hold the rise. The RSI is holding a steady run above the average and that is positive for the scenario.

It is however a curious development that we have 3 weeks of indecision marked by the 3 Dojis which are also spinning tops as the Highs of all coincide. While Gold marches higher relentlessly these 3 weeks of tight range might be considered a warning to the Bulls as most obvious patterns recently failed to materialize.

Gold's relentless rise

Gold is up 69% from the Oct 2008 Lows around $680 and already 11% above it's previous $1033 top. While the trend has the momentum and the fundamental underpinning to proceed I would like to look for contrarian signals.

Just to asses the present moment we have a RSI reading high like in Nov '08 and March '09 - that saw corrections. The Trend strength measured by the Wilder's ADX is reaching the 25 threshold thus signalling the solid momentum of the movement.

As Welles Wilder had written there is a good sign for going against the prevailing trend when the ADX rises above both the +DI & -DI. The timing and the money management is critical to the success of taking such signal as we can see such a setup occurred in Jan '08 but it wasn't until the end of March '08 that the intermediate high at 1033 was reached and the correction ensued.

Pattern-wise I drew a tentative Rising Wedge wich projects a Resistance around $1175-80 level.

The stock indices become weaker and while the might be some Christmas window dressing I see the exponentially rising of the Gold Trend as a precursor of the next bout of stock indices fall.

S&P500 shows signs of exhaustion

The 7 month run of the S&P is exhausted and the momentum is already missing.

RSI and Slow Stochastics are both suggesting that a pullback is imminent - the question remaining is if it would be a short term, intermediate or a long term top?

While I'm far away from the perma-bear state of mind - there is a great chance that the illusion of the end of the "greatest recession" since "The Great Depression" was just cheap liquidity pumped into the system to lift the asset valuations. However Debt ratios remain extremely high and job market is still very weak - that means that consumption and private investments will be scarce and the economic growth can't go on on government spending only - not to mention the gigantic US debt issued in the the last 2 years.

Purely technical picture would suggest we are inside the primary trend channel (red), however the Momentum is already slowing and the price is making only marginally higher highs/ higher lows. The Sideways range channel in the last 2 months confined the advance of the move.

Last weeks advance has been followed by the indecision pattern of 2 consecutive Doji candlestick days. 1100 level is psychological Support and below we go for the 50-Day MA that held all previous corrections. However I doubt this time we will have much support there as I see a fast move towards 1025-50 area where initially the trendline support will pause the price decline.