Buying Normalcy and Selling Mania

My friend and fellow blogger, Max over at Dumb Money, recently asked for some thoughts on IAU, the iShares for Comex gold.

I decided to use IAU for a simple chart tutorial of how to do what the great Alexander Elder calls, "buying normalcy and selling mania".

When a stock, ETF or commodity is in a trending environment, a good way to recognize normalcy is to check the 26-week exponential moving average (EMA) on the chart.

Weekly EMAs tend to act like magnets pulling the stock back to its proper long-term valuation. When the EMA is sloping higher it means the dominant trend is bullish. That is normalcy. Mania is when it exceeds its normal channel.

A simple but effective way to trade this is to buy a stock when it returns to its weekly EMA and sell it when it deviates to its upper channel or Bollinger Band. The reverse is true in bear markets.

See the chart below for an example:

Chart courtesy of StockCharts.com