The mechanical trading system I follow has issued a clear buy signal on the Market Vectors Gold Miners ETF (GDX), which holds 31 companies engaged in gold mining. GDX includes large cap names such as Barrick Gold (ABX), Goldcorp (GG) and Newmont Mining (NEM), as well as some smaller companies focused more on exploration such as Seabridge Gold (SA) and Vista Gold (VGZ).
The mechanical trading system uses a Renko chart, and gives its buy and sell signals via the Parabolic SAR dots. As you can see from the chart below, this system as been issuing pretty useful buy and sell signals and it has now given a clear buy signal (circled).
A Renko Chart of the Market Vectors Gold Miners ETF (GDX) Showing The Buy & Sell Signals
Chart courtesy of Stockcharts.com
About Renko Charts
The name Renko comes from the Japanese word for “brick”, and the filled and hollow squares that make up a Renko chart are often referred to as “bricks”.
Renko charts are price charts with rising and falling diagonal lines of boxes (or bricks) that are either filled or hollow. In the case of the chart shown here the filled boxes are also coloured red.
Renko charts have a pre-determined “Brick Size” that is used to determine when new bricks are added to the chart. If prices move more than the Brick Size above the top (or below the bottom) of the last brick on the chart, a new brick is added in the next chart column.
Hollow bricks are added if prices are rising. Filled (red) bricks are added if prices are falling. Only one type of brick can be added per time period. Bricks are always with their corners touching and no more than one brick may occupy each chart column.
Important to note is that Renko charts are “time independent” charts that do not have constantly spaced time axes.
Basically speaking, hollow bricks are bullish and red bricks are bearish. Renko charts are generally most useful in identifying trends and trend direction because they screen out moves that are less than the Brick size and therefore trends are much easier to spot and follow.
Parabolic SAR dots
The mechanical trading system gives its buy and sell signals via the Parabolic SAR dots. Developed by Welles Wilder, the Parabolic SAR refers to a price and time based trading system. Wilder called this the “Parabolic Time/Price System”. SAR stands for “stop and reverse”, which is the actual indicator used in the system.
SAR trails price as the trend extends over time. The indicator is below prices when prices are rising and above prices when prices are falling. In this regard, the indicator stops and reverses when the price trend reverses and breaks above or below the indicator.
SAR follows price and can be considered a trend following indicator. Once a downtrend reverses and starts up, SAR follows prices like a trailing stop. The stop continuously rises as long as the uptrend remains in place. In other words, SAR never decreases in an uptrend and continuously protects profits as prices advance. The indicator acts as a guard against the propensity to lower a stop-loss.
Once price stops rising and reverses below SAR, a downtrend starts and SAR is above the price. SAR follows prices lower like a trailing stop. The stop continuously falls as long as the downtrend extends. Because SAR never rises in a downtrend, it continuously protects profits on short positions.
This system now shows GDX to be in an uptrend, though traders should set tight stops.