Tuesday, September 13, 2011

Gold: Linear Regression

Linear regression is a fascinating study when examining price action and validating positions. The impetus is always on the trader to collect as much information as possible and take a calculated risk long/short in any trade/investment he makes. There are some that are familiar with Paolo Pellegrini, the trader that identified and masterminded the "the greatest trade ever" reaping billions for John Paulson and their investors. Regression analysis was one of the metrics Pellegrini used when he first identified the housing bubble. Here's an outtake from the WS journal article highlighting it:

Mr. Pellegrini spent hours in Mr. Paulson's office, debating how to deduce a turn in the housing market. Mr. Paulson charged Mr. Pellegrini with figuring out whether homes were, in fact, overpriced. Late at night, in his cubicle, Mr. Pellegrini tracked home prices across the country since 1975. Interest rates seemed to have no bearing on real estate. Grasping for new ideas, Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs.

And link to the full article for more insight:

I have done my own regression analysis using trends/charts/bell curves all on different time periods and with different variables. The chart I am presenting is just one of many examples that has led me to believe conclusively that gold is at least in the short/medium-term(s) overbought and that a significant correction is near. Now of course I could be wrong and all my countless hours of analysis could be wrong, but I feel comfortable in knowing that there is a high likely hood that gold sells off significantly. The following charts I am presenting is just one more example supporting my thesis, though currently an unpopular one. The following is LinearRegCH50 (closed) on the daily chart:

And back to 2002:

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