To Play Good Defense, RT Holds the Key

Investors in gold stocks, myself included, had a rude awakening Tuesday morning. The spot Price of gold was down $70 even before the market opened, plunging below the highwater benchmark of $2,000. Gold ended the day at $1,936, a drop of $92 from Monday, August 10th, and $133 from the Thursday, August 6th high of $2,069. Most gold stocks Tuesday shed between 5% and 12% on the day.

Somewhat surprising, the TSX held its own in early trading Tuesday. But, by the afternoon, the fix was in, and the TSX turned negative, closing lower by 108 points. It was much the same south of the border. The DOW and S&P500 held moderate gains well into the afternoon before closing modestly lower. The NASDAQ struggled at the open and then fizzled out altogether late in the day.

The day was a good reminder never to get complacent. After such a robust, sustained rally in gold and silver shares, the type of profit-taking that happened Tuesday might have been expected. Stocks don’t usually go straight up, at least not without the occasional pullback, some more severe than others. Investors, including me, would have been well-advised to take some profits at the first sign of trouble. As I will explain shortly, there were some warning signs.

And we should never get too greedy. Investors no doubt have been breathing a sigh of relief after a substantial recovery following the COVID collapse. Gold and silver stocks, and others, have lifted many portfolios well above pre-COVID crash levels. Now it’s time to aggressively protect those gains and avoid that sinking feeling we had back in February and March.

Playing good defense means having a pre-planned exit strategy, but also heeding any warning signs that may require earlier attention.

RT HOLDS THE KEY

We have four indicators that help us track the market’s trend. Today I am focusing on RT or Relative Timing, a smart indicator that detects subtle changes in Price trends in the overall market and individual stocks.

First, let’s look at what happened with gold. Could we have anticipated the pullback? In the US, we use the HUI, Gold Bugs Index, and the Midas Touch Graph Layout to guide us with entry and exit signals on gold shares. The signal itself is designed to be somewhat slow, smoothing Price in an often-volatile commodity. In the upper half of the graph, our two Moving Averages on Stop-Prices were still moving up in recent days, so no concerns there. But in the subgraph, the 40-Day Moving Average of RT peaked on June 5th. It began a steady decline even as the Price of the HUI continued to rise. This divergence was an early warning, especially after such a lengthy, sustained rally. Further, if you had placed the RT itself on the HUI graph, you would have noticed that while Price hit a new four-week high on August 5th, RT hit a series of lower highs during the same period. Another divergence, and another warning.

Next, in Canada, open a 3-month graph of the Mining (Gold/Silver) Industry Group. Place RT and RT Ranking on the subgraph. What you notice is that both indicators hit high watermarks on August 4th and began falling from there. The Industry RT Ranking fell to 34th from 12th in just four days before the Tuesday crash, a strong warning.

Click or tap image to enlarge.

Regarding individual gold and silver stocks, including those with high VST scores and Price still rising, a divergence was evident with Price hitting higher highs and RT hitting lower highs. These are warnings that we should pay close attention to when keeping profits and minimizing losses is a priority.

Finally, RT on the Market Timing Graph peaked on June 1st and began a steady decline from there even as Price of the VectorVest Composite Index continued to rise and hit higher highs. It is another divergence that should be a warning for investors to start thinking more defensively if they have not already done so. It is still okay to buy and hold stocks if the guidance in the Views gives a Green light and we have follow-through the next day, but prudent investors should use caution. Buy small, adding fewer positions and fewer shares than you would at the beginning of a rally. Set tighter Stops, and if RT starts hitting lower highs, be prepared to make an early exit in an abundance of caution. TO PLAY GOOD DEFENSE, RT HOLDS THE KEY.

P.S. In this video, I demonstrate the techniques for using RT to defend your portfolio, as discussed here. Watch this video, For Good Defense, RT Holds the Key to see the exact method.