Follow The ‘Hot Money’ With Average True Range

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:

image src=”https://tradingmarkets.com/media/2003/Floyd/df121203-01.gif” />

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:

image src=”https://tradingmarkets.com/media/2003/Floyd/df121203-02.gif” />

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—