In the fall of 2008, I spent a week in Austin, Texas, learning from one of the best traders I know.
His name is Kevin Green. He is one of the original developers of the Schwab CyberTrader platform. He traded on one of the original electronic trading floors in California in the early 1990s.
Kevin’s experience of how today’s electronic markets work is hugely valuable. Today, I want to share with you one of the secrets I learned from Kevin.
It has to do with something called “conviction”…
In the old days, market exchanges were big rooms in which discrete groups of people bought and sold securities in specific markets (company stocks, commodities, bonds, etc.). Each group was in specific area called a “trading pit.”
The system was called “open outcry” because guys were literally yelling “BUY!” and “SELL!” at each other. They backed up their yelling with crazy hand signals for the bid (buy) and ask (sell) prices.
On the typical day you didn’t hear much yelling. But when prices were about to make a big move in a certain market, the trading pits went wild.
The more yelling and hand waving, the more furious the price action. This action eventually led to high conviction in one direction – either up or down.
When there is a lot of money behind it, such conviction can lead to a price trend that’s far more powerful, and longer lasting, than normal.
So, how can having a feel for this be valuable if we’re nowhere close to any trading pits?
Below is a 10-year, weekly price/volume chart of the SPDR S&P 500 ETF Trust (NYSE:SPY)on top of the price/volume chart of the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) – a basket of junior gold-mining stocks.
The blue line tracks SPY. The orange line tracks GDXJ. (It only goes back to the end of 2009 because that’s when the GDXJ started trading.)
The vertical bars on the bottom of each price chart track trading volume. Higher bars are equivalent to louder “yelling” and more violent “hand waving” in the pits. They show intense trading is taking place.
When there are several of these bars close together, it’s a signal a powerful price move is forming. In other words, a lot of buying and selling is happening that is likely to lead to a big high-conviction price move.
With this in mind, take a look at the red circle in the black vertical bars, which show trading volume for SPY. Notice the huge volume of buying and selling. This intense trading volume coincided with the stock market crash of 2008-09.
This hyperactive buying and selling led to buying with strong conviction. SPY began a powerful run higher. And it’s still running…
Now take a look at the circled area on the green vertical bars, which show trading volume for GDJX. In recent weeks, we’ve seen an unusually big spike in trading volume
GDXJ has responded by marching higher. This shows a lot of money has come in that’s yelling “BUY!” while not a lot of money is wanting to “sell.”
Action like this makes it clear that investors have been buying junior gold miners with conviction. If you look at GDX, which tracks the senior gold mining sector, you’ll see the same sort of action… except it’s been happening for even longer.
If you get into gold mining stocks right now, you’ll find yourself in the company of high-conviction buyers. And, as my friend Kevin Green taught me, this is exactly where you want to be.
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