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Dave Floyd is away from the trading desk so today's article was written by his trading colleague, Bo Harvey.
Let’s take a look under the hood of two rallies that both began in March. I’m talking about the S&P ($SPX.X | Quote | Chart | News | PowerRating) and the Gold Bugs Index ($HUI.X | Quote | Chart | News | PowerRating).
Here’s the daily S&P with Average True Range for this move up since March:
As you can see, ATR has steadily declined throughout the entire move higher. In other words, range is not expanding along with price; in fact it is declining.
Now, take a look at the ATR on the daily HUI Index below:
ATR for the HUI (composed of unhedged mining stocks) has steadily increased throughout the rally. In other words, range is increasing along with price. Guess which rally I’d rather be trying to play if I’m looking for increasing range? While the charts above are not rocket science, they offer a simple, clear visual representation of the decent range that gold stocks have offered, while the range in the S&P has been less than stellar, especially in recent weeks.
As ATR and, importantly, volume, move higher in the mining sector, it will increasingly attract more speculation and therefore more intraday opportunities for traders, in both directions—witness Wednesday’s very sharp correction in gold stocks. “Hot money” moving into a sector that had been out of favor for several years will offer nimble traders the increasing potential for profitable opportunities.
In the S&Ps, my swing parameters remain 1078-1080, over which 1100 becomes the next critical long term level, and the 50-day moving average at 1046 and rising.
To follow up on last week's comments, ten-year yields reacted for only an intraday move to the Fed announcement, but longer-term may be in the process of forming a triangle on the daily charts, as the tight consolidation continues.
Have a great trading day,
Bo Harvey
bo@aspentrading.com
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