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In the Discussion Forums recently there has been some discussion about a potential double top in Lihir Gold (LGL), which looks quite interesting, so I have decided to write about it here. There has been much discussion lately about the potential that Gold will rise to extreme prices. But it can often be useful to compare the chart of a commodity to the charts of stocks involved with that commodity.
For example, have a look at the weekly chart of LGL below. It made an all-time high price in November 2007. In March 2008 Gold made its then all-time high price. But LGL made a lower top, indicating that it was in a weak position. Its price then proceeded to collapse by almost two-thirds.
Chart 1 – Weekly Chart of LGL
click chart to enlarge
In late 2009 Gold surpassed its March 2008 high and pushed to a new high in December, and a higher high in June this year. But look in the chart below at what Volume has been doing over the last 8 months. When prices rise on declining volume it is a danger sign. Further, while Gold has been making new highs, LGL was still trading well below its 2007 high.
Chart 2 – Gold Weekly Chart With Volume
click chart to enlarge
Now look back to Chart 1. While Gold has pushed to new highs, LGL has instead made a double top. I have also marked on the chart a major range on the Weekly chart that has repeated almost exactly.
An interesting aside, for those of you who like to follow fundamental news items, is that Newcrest Mining (NCM) was looking to take over LGL at the beginning of April. This caused LGL’s price to jump by $1.00 overnight. And yet in Chart 1 the weekly range has repeated and a double top resulted. This only goes to show yet again that fundamental news is only part of a bigger whole, which is why the charts tell the story, if you know how to read them.
For us as traders, the question is what do we do when a top like this is presented? Looking at the Daily chart in Chart 3 below, the current high of 4.48 was made on Monday 28 June. Prices managed to push only 3 cents above the previous high of 4.45. The bar that day was an open-close reversal day. And there was Time by Degrees harmony.
Chart 3 – Set-Up For a Top
click chart to enlarge
Some people see me show a chart like this in a seminar and immediately ask should they go short! My answer is, only if you don’t value your capital. Many people, in my view, spend insufficient time studying the additional trading rules in the Number One Trading Plan. If you go back there you will find that David gives the perfect strategy for trading a set up like this. Gann says it is the safest place to go short. I am talking, of course, about the First Lower Swing Top.
Currently the market has made a first lower top and you could have gone short on 2 July. As yet there is not much momentum, and it is always possible that the market will push higher. If you set up Chart 3 and move the Time by Degrees tool forward, you will see that the next date where it lines up is 14 July (it is the 11th as I write this).
This date might be a first lower weekly swing top. Or the market might run down into this date and make a low and then reverse and go higher. As always, it is the swing charts which show you, in David’s words, ‘how to make the most money out of the market.’
Knowledge is Power!
Tim Walker
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