(Re)Introducing the Western Areas Index

Western Areas Index

The Western Areas Index was popularized in the early 1980s by avid South African resource investors in an effort to more accurately time entries and exits in volatile mining shares.

The Western Areas Index is one of a handful of tools that we consider indispensable: No investment in a resource stock is undertaken without consulting the indicator.

Three measures of momentum are illustrated in the Index:

Long-term:

Western Areas Index

Medium-term:

Western Areas Index

Short-term:

Western Areas Index

How to Interpret the Index:

At Fahy Capital Management, we are contrarians who consider taking trades and investing when sentiment is exceedingly bearish or bullish. When Long-term, Medium-term and Short-term momentum are cratering or peaking, we begin looking for indicator divergences.

In the illustrations above (Silver Futures, Weekly) you will notice that Medium and Short-term momentum are currently printing divergences relative to the price of silver: each is printing a succession of higher lows over the course of several weeks. To us, this indicates an emerging opportunity in the silver space on the long side.

Adding On to an Existing Position, or, Timing an Entry in a Preexisting Trend:

If a trend has been established to the upside, we wait for Short-term momentum prints below 10% before we enter long or add on to existing longs. Likewise, if a trend has been established to the downside, we wait for Short-term momentum prints above 90% before we enter short or add on to existing shorts.

Momentum Convergences:

When Medium-term and Short-term momentum converge below 20% or above 80%, it is interpreted as a warning: it’s time to lighten up or take profits — the trend is overextended. A much rarer event is described by a convergence of Long-term, Medium-term and Short-term momentum. That would constitute a three-alarm warning.

Conclusion:

Although we are resource-sector specialists, the Western Areas Index has proven exceedingly flexible and consequently may be utilized with any stock in any sector and in any time-frame, from 5-Minute to Monthly.




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