True Strength Index Momentum With These Gold ETFs (GDX, GDXJ, GLD)

The True Strength Index is a low lag-time momentum indicator that can be used at http://www.freestockcharts.com/.  Generally, it is bullish when the indicator is above ZERO and bearish when it is below ZERO.   As the indicator is very sensitive and responsive to movements of price, it can be effectively interpreted for buy and sell decisions.  

The SPDR Gold ETF (NYSE:GLD) is making new all-time highs today. So let’s see what the momentum indicator is telling us.  Below is a chart of the hourly price action of (NYSE:GLD).  

A couple of things are obvious.  First, the price performance of (NYSE:GLD) has been steadily accelerating for the past 6 trading sessions.  This is significant because it means that as the acceleration begins to slow, price could still continue higher – but climbing at a slower rate. As the current reading is .45, which is relatively high, I think it likely that gold will continue to rise while the TSI momentum indicator will begin to diverge (trend lower).  

There are a couple of techniques for making a sell decision with this setup.  One could simply wait for the TSI indicator to finally cross below ZERO – which will be some time from now, or sell when the indicator makes it first divergence (a lower high if price is still going higher).  A third technique, and one that you should be forewarned of whipsaw, is to buy/sell when the indicator crosses the moving average (purple line). 

For the past 4 months, The Market Vectors Gold Miners ETF (NYSE:GDX) has been advancing in a pattern of 3 momentum waves followed by a correction.  While there is no guarantee that this particular pattern will continue, it is encouraging to note that we have recently been through both a correction and a consolidation phase and are just beginning a new first wave. 

 
 
It would surprise me if (NYSE:GDX) does not ultimately take out the previous all time high of $54.63. We observe a couple of open gaps in daily trade that may be revisited on a future date.  But for now, this looks like a powerful first wave that should logically be followed by others. 

The chart of the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), not surprisingly, is similar to that of (NYSE:GDX).  The previous (NYSE:GDXJ) high of $31.28 may provide a resting point for this first momentum surge.  

Like (NYSE:GDX), (NYSE:GDXJ) has been progressing upward in a pattern of three True Strength Index highpoints.  The second set or group of 3 highpoints is instructive.  .33 then .29 then .22.  This is an excellent example of price making higher highs while the indicator begins to diverge with lower highs.  It simply illustrates that the rally is losing steam and something to be on the lookout for in making buy/sell decisions.  

Again, I think it very likely we will see this phenomenon of price divergence with respect to momentum in the upcoming week with (NYSE:GLD).   If we do that should encourage longs to inch themselves closer and closer to the door. 

Written By John Townsend  From TSI Trader

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