Parets: Gold’s Recent False Move Down And Fast Move Up Displays Classic Technical Pattern

January 12, 2012

Money manager and founder of All Star Charts talks technical trading and how false price breakdowns can lead to a quick profit for investors.

 

 

While the idea of technical price analysis may sound complicated for the everyday investor, market technician J.C. Parets points out that most investors are already doing it by simply studying market behavior and the price action of any asset. Parets, a money manager and founder of All Star Charts, is a Chartered Market Technician and member of the Market Technicians Association. HAI Managing Editor Drew Voros recently spoke with Parets about technical price analysis and how it can be applied to assets like gold.

 

Hard Assets Investor: What advice would you give an investor who’s interested in technical analysis?

J.C. Parets: I don’t really get too complicated. I’m more of a “keep it simple, stupid,” kind of guy. From what I’ve noticed, a lot of these very successful technicians really have been on the more simple side, really just analyzing price. A lot of people are conducting technical analysis without realizing that’s exactly what they're doing. It’s just trying to analyze price action and the behavior of the markets.

When you're talking about certain correlations—when the dollar goes up or down, how that affects commodity prices, how interest rates affect bonds, all of that—we’re looking at the behavior of the market. That’s technical analysis.

HAI: You’ve written recently about false price breakdowns in gold and how that can lead to fast moves in the opposite direction, as you like to say. How do you identify them?

Parets: The first and most important thing is to find a trend. One of the reasons that 2011 was difficult for stock traders was the lack of trends. We were down some, we were up some. But we were just in a sideways market. That makes it real difficult. But there were trends in other asset classes like gold. It’s been in a long-term bull market since the turn of the century, not just on an absolute basis, but on a relative basis as well, which I think is even more important, relative to stocks.

Back in 1980, the ratio of the Dow Jones industrial average to gold was 1-to-1. Over the next 20 years, that ratio went from 1-to-1, to 42-to-1. In other words, in 1980, one share of the Dow bought you one ounce of gold. In 2000, one share of the Dow bought you 42 ounces of gold. That’s the bubble that popped at the turn of the century. You don’t hear a lot of people talking about it. Ever since then, that stocks-vs.-gold ratio has been declining; 20-to-1, 10-to-1. Earlier this year we got below 6-to-1. Right now, if I’m doing the math correctly, the ratio is probably somewhere around 7- or 7.5-to-1.

But that trend is still down. Historically, gold doesn’t make top until that ratio is somewhere between 1–to-1 or 2-to-1. We still have a long way to go. We know the trend is there, not just on an absolute basis. We know gold is making higher highs, but on a relative basis, compared to stocks as well. Where do you get involved?

Let’s use gold as an example. Stocks can temporarily make new lows and quickly recover. A lot of times that might happen in a slow week. And, in this case with gold, that’s exactly what happened in between Christmas and New Year’s Day. Gold made new lows. And, sure enough, it quickly recovered and came back. Thursday [Dec. 29] was a key reversal day. It followed through a little bit on a slow Friday [Dec. 30]. And then, sure enough, we come back to work on Tuesday morning [Jan. 3], and we are a gap higher in gold.

We need a little bit more confirmation for the upside before we buy any more or pile it into the trade. But, when you see that, it represents a good risk reward, which, at the end of the day, is all we really care about.

 

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