Van Tharp Newsletter

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  • Workshops 2010 Fall Workshop Schedule, Including Something New!
  • Article Gold Analysis and Strategy as of August 8, 2010 by Florian Grummes
  • Trading Education Free Super Trader Book with Full Position Sizing Game Purchase!
  • Trading Tip The August Market Doldrums: Fact or Fiction? by D.R. Barton, Jr.
  • Mail Bag Calculating %ATR for a Specific Market


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Feature Article

GOLD Analysis and Strategy 8th of August 2010


Gold in USD (one ounce = US$1,205.20)

Since July 23, gold has had sharp movements in both directions. After breaking the up-trend line, the price of gold quickly went down to US$1,155.90. From here a remarkable rally started that brought prices back above the important level of US$1,200 at the end of last week.  Now the important question is, “Have we seen the lows for this summer correction or will there be another leg down (e.g., ABC correction) before gold moves to new highs?“

The next strong resistance to the upside is now in the middle of the 50-dMA (US$1,211.51), the Bollinger Band (US$1,216.75), the 61.8% Fibonacci Retracement from US$1,266.50 to US$1,155.60 (US$1,224.10), and the December high of US$1,227.80. Therefore, the current rally should stop between US$1,215 and US$1,225 and gold might take a breather.  Downside support is still the up-trend line, which now is around US$1,190. Another break of this trend line would be extremely negative and could lead to another sell off and a  test of the 200-dMA (US$1,150.21). All in all, it’s a tricky picture. The daily chart looks bullish after this dynamic recovery while the weekly chart still remains bearish.

chart 1

  chart 2


Volume has been pretty low during this last move from US$1,156 to US$1,210. You can see this in the chart of GLD Streettracks ETF.

chart 3

The medium and especially the long-term picture are still very bullish. My next price target is the Fibonacci Extension (261.8% of the last big correction) at US$1,600. It’s possible that gold won’t reach that level until end of this year or spring 2011.

The Dow Jones/Gold Ratio remains nearly unchanged at 8.84 points.

Long term, I expect the price of gold to move towards parity to the Dow Jones (=1:1). The next primary cyclical change is still years away. This means we are still in a long-term bull market in gold (and also commodities) and in a secular bear market in stocks.

Gold in EUR (one ounce = 907€)

chart 4


chart 5

If you had followed my advice in my last issue, you would have already purchased gold for under 890€. I doubt that this was the only opportunity to buy under 900€, but it is simply important to consequently buy weakness. Short term gold in € is oversold, so I think we could see a recovery to around 940€. It’s still missing the test of the 200-dMA (852€). Also, the weekly chart on the right side gives the impression that the breakout level around 800€ needs to be tested for support before a new sustainable rally can start.

Gold Bugs Index USD (459.94 points)   

chart 6


chart 7

The Gold Bugs Mining Index HUI is about 8 points higher since my last analysis. First, the index rushed down to 430 points. From there a strong rally started that took the unhedged gold miners back above the important 200-dMA (440.28). Again the 200-dMA proved to be strong and solid support.  Now the index is fighting with resistance at the 50-dMA (458.22) and the Bollinger Band (466.73).

Personally, I am not a big fan of the mining shares even though as a long-term investment, selected gold mining stocks have a huge potential. They also might offer some advantages in case of a gold prohibition. At the moment, however, the miners‘ volatility is extremely high compared to all the years I have followed this sector. Gold shares are really a roller coaster ride right now.  

There are a number of factors that make longer term investing in gold miners unattractive.  Gold mining companies offer no high dividends.  You have to research a lot of companies so that you diversify in, at minimum, a couple of stocks. In addition to the technical analysis, you need accounting and geology skills if you want to hit a home run with one of these companies.  On top of that, the company might be confronted with political risk that hardly can be estimated as long as you haven´t been at the mine or in the country yourself.  Because most mining shares trade in US and Canada, you´ll need Level 2 real-time data feeds to trade and invest in them professionally.  Finally, mining is not very friendly to nature and, therefore, definitely not a sustainable investment long term.

Even though I don’t trade the gold mining group at all, I do watch them carefully because analyzing them helps me to understand better what is going on with gold itself. (As an aside, I do not like gold funds either.  When you buy a fund, you take 100% risk but you pay the fund manager a nice cash flow income regardless of the fund or sector performance.   My money goes into long term physical holdings and short term options and warrants on gold.) 

Gold COT Data

chart 8

Although prices moved down to US$1,155.90, the commercials increased their short position for around 12,000 contracts.  These numbers are from last Tuesday; therefore, they do not include the last move up to US$1,210.

04/18/2009 = -153,419  ( PoG Low of the day = US$885 )
12/01/2009 = -308,231  ( PoG Low of the day = US$1,190 )
05/11/2010 = -282,644  ( PoG Low of the day = US$1,201 )
06/15/2010 = -278,944  ( PoG Low of the day = US$1,220 )
06/22/2010 = -288,916  ( PoG Low of the day = US$1,232 )
06/29/2010 = -289,956  ( PoG Low of the day = US$1,231 )
07/06/2010 = -249,142  ( PoG Low of the day = US$1,191 )
07/13/2010 = -248,348  ( PoG Low of the day = US$1,197 )
07/20/2010 = -215,664  ( PoG Low of the day = US$1,175 )
07/27/2010 = -227,555  ( PoG Low of the day = US$1,156 )
08/03/2010 = -222,029 (PoG Low of the day = US$1,180 )

Gold Seasonality

Volume remains low and seasonality will not favor higher prices much until the end of August.  Soon, though, the weak seasonal period will come to an end.  September is one of the best month‘s of the year for the precious metals sector.

Gold Sentiment

The weak hands should be out now due to the last set back under US$1,160.  The Put/Call Open Interest Ratio for Gold Futures confirms this.


Total Calls

Total Puts

PC Ratio










































chart 9


Long term, gold should be on the way to my next price target around US$1,600.  Due to the recent correction, most of the weak hands should be out by now.

The current rally could continue to move a little bit higher to a maximum of US$1,218 – US$1,225. From here we should see another decline. But whether prices will move down under the up trend line around US$1,190 is really hard to say at the moment.  As long as gold is not clearly closing above US$1,220, we should expect a second wave down, which could take prices back to US$1,160 – US$1,145.  A strong move above US$1,220 instead would finish the correction and signal the start of the next rally to new all-time highs. This scenario becomes more probable the longer gold is able to hold above US$1,220.

About the Author: Florian Grummes (born 1975 in Munich) has been studying and trading the gold market since 2003. In addition to his trading business, he is a very creative and successful composer, songwriter and music producer.   


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Trading Tip

The August Market Doldrums: Fact or Fiction?

I hope that everyone is enjoying the summer.  Many people use this time of year to relax and refresh.

There are some notable summer vacation clichés, like the one about France shutting down for the month of August and Wall Street activities grinding to a standstill while the top traders head to the Hamptons leaving the B team to mind the trading desks.

Having worked intimately with a French firm during a technology transfer back in my engineering days, I can say that  many smaller businesses in France do, in fact, take the month off.  Also, top government officials take the full month for vacation.

In August, 2003, my family vacationed in Paris when the most infamous heat wave ever hit the country.  We spent a week there  and the LOWEST high of the week was 107 degrees Fahrenheit!  That level of heat may not seem like much to our readers in, say, Arizona, but the average daily high temperature for Paris in August is 75 degrees! 

I find this story apt because the slow response of the government to a heat wave that killed more than 14,000 people was blamed on the fact that a majority of the French health administration was away on vacation and failed to return in a timely manner.  While France doesn’t shut down during August, it certainly does slow down.

Does Wall Street Really Slow Down in August?

What about the common perception that Wall Street has a similar slow down for similar reasons?  To see if this is true, I took two paths to look for an answer.  Initially, I talked to a Wall Street veteran to get a firsthand account.  I then looked at the hard numbers to see if they corroborated the perceived August slowdown. 

My best friend and business partner Christopher Castroviejo has over three decades of experience on Wall Street.  From a partnership in one of the leading investment banks to running a hedge fund trading desk for many years, Christopher has just about seen and done it all on Wall Street.  I asked him about this common perception of a trading slowdown in August.

Christopher said that the A team traders and managers do typically head to the Hamptons or to the beach for much of August, leaving the B team to manage the trading activities.  These junior traders have strict explicit and implicit instructions on maintaining the status quo rather than taking big risks while the senior ranks are away.

Christopher added, “The last thing a vacationing trader or manager wants is a phone call about a trading problem at 9:30 in the morning after being up with the glitterati until 4:00 a.m.”  Enough said.

So the word on the Street is that August is indeed a month of leisure for senior traders.  Does the historic market activity support this assumption? 

To answer that, I looked at volatility as a proxy for market activity.  I compared August volatility to the 12-month average of volatility as measured by Average True Range (ATR).  ATR is simply the range (in this case, the monthly range), taking into account gaps.  The table below presents the raw data for the last 10 years.

August versus Average Monthly Volatility


12 Month ATR

August ATR

August % vs. Annual









































As you can see, for 8 of the last 10 years, August volatility was below the monthly average.  Only 2007 and 2002 had Augusts with higher than average volatility.

So What?

Should traders and investors take the month of August off?  One of Van’s famous Top Tasks of Trading is spending time out of the markets, and the summer is a good time to exercise this task! 

This does not mean to stop trading in August—profitable opportunities remain even during this month!  However, in this period of traditionally lower volatility, practice prudence and be a bit more demanding of your trade set-ups.  Take only the highest quality set-ups and then relax and refresh. 

Everyone needs a good break every now and then.

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


Disclaimer »



Calculating %ATR for a Specific Market

Q: I don't completely understand volatility. Dr. Tharp had a %ATR chart in a recent newsletter.  Can you detail how he calculates the %ATR for a specific market? 

A: Van compares today's S&P 500 daily ATR% (20 day period) to the mean of the S&P 500 ATR%’s for all days in about the last 40 years. The ATR% is the ATR divided by the closing price.  Today’s ATR% distance away from the historical mean (in terms of standard deviation) defines market volatility conditions. Van defines normal volatility as within 1 standard deviation (SD) on either side of the mean, quiet is more than 1 SD lower than the mean, volatile is between 1 and 3 SDs more than the mean and very volatile is more than 3 SDs above the mean. I don't believe he found any such thing (statistically speaking) as very quiet conditions in his data. 

The mean S&P 500 ATR% is 1.5%  and the SD is 0.503%.

— R.J. Hixson

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August 11, 2010 - Issue 487


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