Thursday, 14 January 2016

Technical Analysis of Barrick Gold Price Chart

 Out At Last! 
As I mentioned in my article When Will the Price of Gold Recovers that I bought some Barrick Gold (ABX) stock back in Oct 2015. Here's my thinking - or more importantly, the lesson I've learnt - about the purchase.

5 year chart of Barrick Gold (ABX)
5 year chart of Barrick Gold (ABX)
(Click to enlarge)

This chart shows that for the 1st time in some 4.5 years, the price of ABX has finally broken out its downtrend line.

Let's zoom in to take a closer look at it with the latest 1 year chart.

1 year chart of Barrick Gold (ABX)
1 year chart of Barrick Gold (ABX)
(Click to enlarge)

If you look at this 1-year chart, the best time to get into it is after Nov 2015 when the price had broken out the downtrend line. To play it safe, it's better to buy, say in mid Dec 2015, when the price had well and truly clear its downtrend line.

 The Waiting Game 
It was reckless of me to buy it in Oct 2015, instead of waiting for merely another 2 months. My impatience has got a better of me from time to time.

However, I would like to defend myself for the decision of purchase back in Oct 2015 for the following reasons.

The 1-year chart shows some bullish divergences in the MACD, Money Flow, and RSI on July and August 2015. It's this bullish divergence that spurred my decision that when the price comes against the downtrend line in Oct 2015, I jumped in.

On hindsight, while this has worked out for me, I wasn't disciplined enough. I SHOULD have waited until the price had broken well clear of the down trend line sometimes in mid Dec 2015. On the other hand, again in defending myself, since I'm not a day trader, but a contrarian investor, I wouldn't require precision timing to such degree. Still, it's good to be disciplined.

In any case, things had worked out well so far, and ABX is now in the uptrend line. How long? Nobody knows. But let's look at a few additional things.

Let's see how ABX fares against the spot price of gold so far since this uptrend started back in early Oct 2015.

1 year spot gold price chart
1 year spot gold price chart
(Click to enlarge)
While the gold price slid - dramatically I might add - between mid Oct and start of Dec, and yet ABX share price held steadily around the $7.5 - $8 range until it broke out of the downtrend line. When company's underlying product of gold is falling in price, and yet its share price held up, it's a positive sign for the stock.

 Share Price to Gold Ratio 
We all know that the share price of a gold producer is leveraged to its changes in gold price. If gold price falls by, say 50%, the gold producer's share price will typically fall much more than 50%. In fact, this had been the case until last Oct as the following chart clearly indicates.

5 year chart of ABX to Gold ratio
5 year chart of ABX to Gold ratio
(click to  enlarge)

The downtrend in this ratio chart is telling us that ABX is falling faster than its underlying spot gold price, as is expected (and it's also true in the opposite direction. I.e. its share price is also rising faster than spot gold price rises).

We can see from this ratio chart that ABX outperforms gold price since last Oct. And its out-performance (indicated by the steepness of the curve) had never been so strong throughout the whole 4.5 years of the bear market in ABX. This suggests ABX's share price strength relative to gold price of late. A positive sentiment for the stock.

What's also showing is that a golden cross is about to occur. A golden cross happens when its 50 day average (blue line) crosses above its 200 day average (red line).

It hasn't happened yet. If you look at last July on the chart, the blue line touches the red line and then turns back south, instead of crossing above it. This time, it can repeat what happened in last July, and many previous occasions where the blue line fail to cross above the red line.

So if I want to play it safe, I should wait until this happens, which would happen very soon. As a matter of a week or two at the most. My gut feeling tells me it would cross. Having said that, a golden cross ALONG isn't sufficient indicator. Again,  if you look at the ratio chart, you can spot a golden cross at Jan 2014, but it turns out to be a false or short-lived golden cross.

Well, I won't have to wait long to confirm my gut feeling.

Of course, there're many fundamental reasons why gold price should go up, but since this is an article on TA, some of my gut feelings were also derived from fundamental analysis.

 Fundamentally Speaking 
I'll talk about the fundamentals of ABX briefly.

When gold price is rising for awhile, the management typically became careless about its finance in a rush to grow the company as if the gold price will go up forever by taking on escalating debts. When gold price begun to fall, all that financial troubles reared its ugly head. Oct 2012, the company share price plummeted for more than 60% in the next 8 months. The worst period during this ABX 4.5 year decline.

The change in sentiment in the company that captured in the chart was due to its change in fundamentals, especially in 2015 where the company's new management made aggressive moves to clean up the company balance sheet and operation to a healthier state and has restored some confidence in investors.

What happened to ABX is typical during a boom in any industry. When gold fall, many company suffered similar fate as ABX (to different degrees of course). This leads to shrinking supply. And you know what happen to the price of gold when that happens.

That's true for any commodity, and the reason why market cycles exist.

 Contrarian Speaking 
Perhaps the best reason to buy gold is because all the "experts" are crying gloom and doom.

As Warren Buffet said, "Be fearful when others are greedy, and be greedy when others are fearful." Looking at these articles, many others are very fearful.

I can offer another saying, "Bull market climbs a wall of worry."

1 comment:

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