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Minyan Mailbag:The XAU and Moving Pictures



Prof. Kev-

I don't understand your comments yesterday on how the PHLX Gold & Silver Index (XAU) broke a double bottom? Where? Do you mean the action from last week? Isn't that a relatively narrow approach? Doesn't the fact that the XAU gained back everything it lost on Friday mean anything?

-Minyan Neal "Peart"

Dear Minyan Neal "Peart" -

That is so like you. Always shunning the Limelight, avoiding The Camera Eye like a modern-day Tom Sawyer, breezily cruising down a country road in your Red Barchetta with the top down. You seem to believe I am engaged in some kind of Witch Hunt against the XAU. But all I've done is check its Vital Signs. Let's take a look:

This chart shows the sell signal for the XAU on a 1x3 chart.

PHLX Gold & Silver Index (XAU)
(Chart courtesy

If one is using the XAU index options for a speculative vehicle, or keying another trade off this index, then the fact that the XAU has given a sell signal simply increases risk in that index. It does not mean the XAU must collapse.

How one manages a stock or position in which risk of ownership (or of being short) has increased is an individual manner. The reason I point out such "signals" is simply to raise awareness that a change in the supply/demand relationship has taken place.

As I noted in the post you referenced, the initial downside count for the XAU is 140 based on this sell signal. A decline to 140 would simply be a "correction" in the popular terminology of some on Wall Street who define any decline less than 20% as "NOT a Bear Market."

Risk is dynamic. Buying something, say, YYZ at $200 is not inherently riskier than buying YYZ at $100. At least not in negotiated financial markets. This is a very difficult concept for most investors to grasp. Because we are conditioned to think of things, especially numbers, in strictly linear fashion, it just doesn't seem possible that it can actually be less risky to pay twice as much for something. But that is the nature of risk, especially when the driving factors behind pricing become dominated by psychology. Point and figure charting simply allows us to evaluate the changing context of risk in a security at any given time.

So, Minyan Neal "Peart", this is all a long-winded way of both saying that risk increased on the XAU once the double bottom sell signal was given at 150, and as long as the XAU remained below the 156 level.

More importantly, however, as incredible as this may seem, this has also been a long-winded way of using every track from Rush's Moving Pictures LP in a sentence! I'm serious - check it out:

Moving Pictures
1. Tom Sawyer
2. Red Barchetta
3. YYZ
4. Limelight
5. The Camera Eye
6. Witch Hunt
7. Vital Signs

I admit, the YYZ had me worried for a moment, but I was able to save it with the example in paragraph 5.

No positions in stocks mentioned.

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