Gold pennant

I've been pointing this out to subscribers for a couple of days now. GLD has formed a pennant pattern. Yes I'm showing you a pattern. I know shell shock right? :) The only reason I'm pointing it out is that I'm bullish on PM. Now that I've got the disclaimer in; I've noticed in the past that these continuation patterns often form about half way through a move. As of today GLD is looking like it wants to break out of the pennant to the upside. Many of the leading gold stocks were very strong today. Probably a good sign that gold will be moving higher in the coming days. If you are trying to trade gold be mindful of your position size as the sentiment in gold is getting quite bullish. However I think the rise was so swift that many investors missed this trade and even though they may be bullish I'm not sure they've actually committed cash. If not and gold continues to rally we may get investors eventually chasing GLD higher. Just remember the PM are volatile and it could just as easily take a dive.

Thanks Fed, Thanks a lot

Yesterday the dollar traded intraday down to levels it has never been at before. I expect we could see an attempt at a rally here but it seems very unlikely that it will amount to much. Take a look at the long term chart of our currency and you can see what the Fed has done to the purchasing power of our money. Be thankful I can't show you a chart from 1913 when the Fed was created, you would freak out. Since 1913 the Fed has destroyed over 90% of the purchasing power of the dollar. Thanks Fed, thanks a lot. If the dollar does try and hold the line in the sand however temporary then Gold may hesitate here for a bit. However with all the recession talk I'm hearing on the media now days it seems like an almost sure bet the Fed is setting their cover for another rate cut next month. I highly suspect that the reaction of the dollar and gold is going to be the same as it was last week when they cut. Dollar down gold up.

Hope and Fear

I see quite a few comments on the blogs that the markets are overbought and that's the reason that a correction is imminent. I've got news for you hope and fear operate differently. Which is to say that markets don't go up the same way they go down. Pretty much any breakout is going to be overbought. Just look at the two charts. The S&P was already overbought by the middle of Aug. in 06 but that didn't stop it from going up another 6 1/2 months. Same for gold only it was even more extreme. As markets continue to rise hope gradually brings more and more investors in as an increasing amount of people become confident in the move. Sometimes this becomes really heated and you get a parabolic rise. Fear is a different animal altogether. It doesn't take too much pain before everyone gives up all at the same time. When that happens there are no sellers left to sell and the market has no where to go but up. That's why the VTO and Bollinger band crash trades work during declines. If you tried to reverse the rules and apply them to tops they will fail miserably.

GS a Guaranteed 30% Return revisited

Remember this post GS A Guaranteed 30% return. I took a lot of heat on this one. But only a little more than one month later Goldman is up 20% already. Come to find out Goldman is a pretty good company. Even though the charts were telling us that Goldman's business was going to hell in a hand basket we now find out that Goldman's traders were a little more savvy than that. They had been shorting the real estate debacle. So instead of losing a ton of money they actually made a ton. Who knew? I only show this because it illustrates very well how panicking never made anybody any money.

"After all it is a bull market"

I love this story from Reminisces of a stock operator. It is so appropriate to the gold and silver market.

"Most let us call' em customers -- are alike. You find very few who can truthfully say that Wall Street doesn't owe them money. In Fullerton's there were the usual crowd. All grades!Well, there was one old chap who was not like the others. To begin with, he was a much older man. Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others.He did not seem very keen to get tips -- that is, he never asked the talkers what they'd heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again -- when the tip turned out O.K. But if it went wrong he never whined, so that nobody could tell whether he followed it or let it slide by. It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn't donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast.The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock.They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap's answer was always the same.The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?"Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, "You know, it's a bull market!"Time and again I heard him say, "Well, this is a bull market,you know!" as though he were giving to you a priceless talisman wrapped up in a million-dollar accident-insurance policy. And of course I did not get his meaning.One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning's story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it. Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours."Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out."Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap."Well, now is the time to take your profit and get in again on the next dip," said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary's face Elmer went on: "I have just sold every share I owned!" From his voice and manner you would have conservatively estimated it at ten thousand shares.But Mr. Partridge shook his head regretfully and whined, "No!No! I can't do that!":'What?" yelled Elmer. "I simply can't!" said Mr. Partridge. He was in great trouble."Didn't I give you the tip to buy it?""You did, Mr. Harwood, and I am very grateful to you.Indeed, I am, sir. But --" "Hold on! Let me talk! And didn't that stock go up seven points in ten days? Didn't it?""It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock." "You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers."No, I couldn't.""Why not?" And Elmer drew nearer."Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation."That's all right," said Elmer, looking angry because of his disappointment. "I know this is a bull market as well as you do. But you'd better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.""My dear boy," said old Partridge, in great distress "my dear boy, if I sold that stock now I'd lose my position; and then where would I be?"Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: "Can you beat it?" he asked me in a stage whisper. "I ask you!"I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five hundred shares. He's got seven points' profit and I advise him to get out and buy 'em back on the reaction that's overdue even now. And what does he say when I tell him? He says that if he sells he'll lose his job. What do you know about that?""I beg your pardon, Mr. Harwood; I didn't say I'd lose my job," cut in old Turkey. "I said I'd lose my position. And when you are as old as I am and you've been through as many booms and panics as I have, you'll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don't feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It's a bull market, you know." And he strutted away, leaving Elmer dazed. What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market.The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

Point and Figure charts

Since we were discussing the Point and figure charts in the last thread I thought I'd put them up. Breakouts in Gold and XAU. SLV has reversed the down trend. The bullish price objective on gold is $900. SLV is almost $190 which would be $19 silver and the XAU is coming in at $274. That would be pretty close to my observation that each major upleg has resulted in a 100% swing for the XAU and HUI from trough to peak. I wouldn't even think about trimming any of my PM positions until we get to those levels.

silver/gold ratio

Since the middle of 03 silver has been outperforming gold. Notice how silver when it starts to move takes off like a rocket. That's what happens when a little bit of money moves into a very thin market. Silver took a beating on Aug. 16th. However look what has happened in the past after one of these washouts. I have a feeling it won't be too long before silver starts to make up for lost time. If there is anything in the investing world that is ridiculously cheap it's silver. The commercials seem to think so to as they have had over the last 4 weeks one of the smallest net short position since 03. Even more bullish in my opinion is the fact that as silver rose almost a dollar they got even more bullish. This my friends is one of those opportunities that only come around every once in a while. I've heard a bit of talk about gold in the media recently mostly as a signal of inflation rarely as an investment but I have yet to hear a single thing about silver. I just love it when that happens. It means silver has a long long ways to go.

Breaking bad habits

I've talked about this before but at this point it probably bears repeating. Take a good hard look at your trading methods. If you haven't made money or haven't made very much then perhaps you need to modify how you trade. I've observed that quite a few traders on the blogs repeatedly tried to catch every little swing the market made during the last bull leg. I dare say very few of them made any money. The market has moved over 23% during the last year. If your trading methods haven't produced a profit with gains like that then you most likely need to do something different. I see quite a few traders already setting themselves to try and trade back and forth again. Many of these traders have admitted that their accounts are not up. At what point do you quit making the same mistake over and over?

Weekly gold and silver charts

Notice that gold has again bounced strongly off the 65 week moving average that has acted as support for every decline in this bull. Silver was a little weaker. That's understandable as silver is a very thin market and moves in both directions will be more volatile. However it hasn't taken long for silver to recover and close above the moving average. The average is also again moving up. Now let me point out something. We will eventually surpass the old 1980 highs. However in inflation adjusted terms we still have a long way to go. Simply put that means that gold and to an even greater extent silver are dirt cheap right now. This bull still has a long ways to go yet.

Gold ready to spring?

The Gold market looks like its getting coiled again. Normally big moves follow. So far this morning Gold is up strong so I'd be leaning towards an upward move out of this level. Also technical rule #1 could come into play here. If so we could look for a similar sized move in the coming weeks as what we just saw. That would suggest that Gold could add on another $70-$75 fairly quickly. I imagine the PM stocks will follow and break out to new highs.

Tis the season

Since the commodity bull started the period between July and Dec. has been very good for PM. Last year was the only year that didn't have big gains and it was still flat. The average gain has been 12.5% for any year gold has been up during this bull market. After the flat year last year and the size of the consolidation I suspect this year will be up much more than 12.5%. The max year was 05 at 20.4%. 05 was also a year following a large consolidation. Since this consolidation has been larger than the 05 consolidation I would expect at least as large of a rally as 05 and probably even larger. 20.4% would put gold at $795 BTW.

COT report

Still long. Who knew?

Gold/Oil ratio

In the beginning of the commodity bull market gold outperformed oil. The Fed started cutting at the beginning of 01 and the gold bull market got underway. It quickly reached a peak of 1 oz. of gold buying about 15 barrels of oil. From there things turned in favor of oil for the next 3 1/2 years. In 05 one oz. of gold would buy only about 6 barrels of oil. Since Sept. of 05 though the advantage has swung back to gold. After correcting for the first half of the year I think gold is now ready to resume it's out performance. During the commodity run so far oil is up in the neighborhood of 700% while gold is only up a little less than 200%. It's about time gold makes up for lost ground. For gold to catch up to oil it will need to rise to $2000. I have no doubt that gold will do just that over time and probably much more. Silver would need to go to $32. However silver is the most undervalued commodity and at some point the market will recognize this and I expect silver to increase much more than 700%. I think 2000-3000% is probably more realistic for silver. Hence my constant harping on silver :)

Evaluate your trading

I read quite a few blogs and occasionally comment on a few. All in all here is the impression I get from the blogosphere. A big percentage of traders fall into the day trader category. Here's another impression I get from reading the blogs. Most of these traders are losing money. I'll tell you right now I followed the same path when I started trading. Day trading is exciting. You get a sense of doing something. However after several years of watching my account slowly dwindle down I was forced to make a realistic judgement that my trading methods were not working. I'm sure we all rationalize it as just a string of bad luck and it's all going to turn around on the next trade. Unfortunately it never does. If you keep using the same methods is it any wonder that you keep getting the same results. I liken it to watching a rat in a maze that just keeps going to the same dead end. Humans fortunately are a bit more intelligent than rodents...or are we? Sometimes I have to wonder when I see otherwise intelligent people continue to do the same thing over and over and still become amazed and disappointed that they don't get the result they are looking for. The sooner you can come to grips with the fact that what you are doing isn't working and try something different the quicker you can get down to the business of making money.

Of course for the investors that have found a trading style that is consistently making money, I say if it's not broke don't fix it.

A most important chart

Remember this chart? I said before this is a very important chart maybe the most important chart. It's the ratio of the Dow divided by gold. Historically PM bull markets continue until this ratio hits or at the very least gets close to 1:1. Briefly this ratio hit 1:1 in 1980, the top of the last commodity bull market. As you can see we've got a long way to go yet. Now whether this happens at $3000 gold and $3000 Dow or $15,000 gold and $15,000 Dow I have no clue. Knowing human nature though it will happen sometime in the future. When it does I'm going to be telling everyone to sell your gold and silver and buy stocks. In the meantime there's a lot of upside still left in this chart. Might as well get on board. Better late than never.

NEM

Stodgy old NEM which has been underperforming for the last year and a half has now broken the down trend. If NEM is on the move I have a feeling that's a very bullish signal for the PM markets.

Golden bull

As anyone who reads the SMT knows by now I think the first leg up in the second phase of the gold bull market has begun. Take a look at the last leg up in the first phase of the gold bull. Over 61% from the breakout. Now look at the 8-9 month consolidation phase right before that move. I'll point out how well technical rule #1 applied to this huge up leg. First gold broke out in Sept. and rallied hard until Jan-Feb. when it traded sideways for a couple of months then it broke out again moving quickly to $700+. Then the correction that brought gold right back down to the consolidation level. It has been moving steadily upwards ever since and in the process it's been lulling all the gold bugs to sleep. I'm sure most gave up on gold and especially silver on Aug. 16th. Of course that was the day you should have been backing up the truck. Now it looks like gold is ready to breakout of this year and a half trading range. After the size of this consolidation I suspect we will all be amazed how high gold goes. Let's just say I will not be at all surprised to see a 100+% gain during this leg up.

Recessions

I'm going to point out again tonight the main cause of recessions is spiking energy prices not credit crunches or real estate woes. Notice the spike in 80. It was followed by two recessions. The 90 recession was accompanied by a vicious spike in oil prices during the Iraq war. The 2001 recession soon followed a year long spike in oil price. I believe if we see oil near or above $100 by the end of the year then we can probably look forward to another recession in the not to distant future.

Here we go!

It appears more and more likely that gold is ready for it's first leg up in the second phase of the secular bull market. If this leg can take gold above the 1980 highs at $880 we could see a tremendous upwards move. I've said this many times in the past but it bears repeating because I think quite a few investors are going to make this very critical mistake. You have to be in when the PM start to move or you risk missing big parts of the rally. These are thin markets and a little buying pressure can make them move rapidly. Just take a look at the rally in gold over the last 4 days. The big money will be made by buying and holding on. Unless you are very good or very lucky, you will most likely cut your gains significantly by trying to jump in and out of the this market. This is not a bull market that you want to lose your position in.

Gold

Quadruple top breakout on Gold yesterday. Gold is on the move. If gold can put an x in the $700 box I think the next major upleg will be on.

TRINQ buy signal

I wanted to post the charts relevant to the TRIN discussion we've been having on the previous post. Here I've posted the last three times the TRINQ closed below .50 three consecutive days in a row. These levels normally signal extreme buying frenzy and at least a short term top. However when combined with multiple consecutive closes below .50 and the market emerging out of an extreme oversold level it has historically signaled the beginning of powerful intermediate rallies.

90% days

What we are looking at here is a series of 90+% up volume days. Notice how the last couple of intermediate term rallies have begun with a series of powerful up days. As of Friday we've now seen three of these in quick succession. The market got about as washed out as it's ever been a couple of weeks ago. The only time in recent history that may have been more was 98. This is the kind of action one would typically look for after this kind of washout. To many investors IMO are concentrating on the current problems. I think there's a very good chance the market has already discounted the sub prime mess. Now the market is on to bigger and better things. It's looking 6-9 months down the road and as of right now it appears to like what it sees.

Time for PM to move

Look closely at the two charts and you will notice a couple of things. First the big moves normally occur from a bottom in late summer until Jan.-Mar. You'll also notice that from trough to peak every one of these moves in both the HUI and XAU logged a 100% move. Now notice the monthly Bollinger bands are squeezing down to a very narrow range. This is what has happened prior to big moves in the past. Only this time volatility is drying up even more than in the past. Now let's factor in a couple more positives. The COT is at very bullish levels for both gold and silver, especially silver. We are now in the window of time when the PM "outperform". On top of all that the dollar appears ready for another leg down in the secular bear market. Adrian Douglas has also noted unusual activity in the options market. The same activity seen prior to the big run in late 05 and early 06. Got gold? (or silver)

Sept. the weakest month?

Over the last 26 years Sept. has been up 12 times and down 14 with one year even. Not exactly great odds of Sept. being either up or down. The % gain for all up Sept. is roughly 33% while the % loss for all down Sept. is 58%. However without the 3 bear years (2000-2002) the % loss is 33%. The odds are probably about 50/50 for Sept. being a down month. However if you narrow the data a bit and look for periods where the market had an intermediate decline in the month or two prior to Sept. then the odds of a positive Sept. improve a bit. 8 to 5. Now if you factor in the historical returns seen for the months after the kind of breadth extremes we saw in Aug. then it would seem the odds are much better for a positive Sept. than a down one.

COT Report

The commercials are still long this week. The total net position for all index contracts increased slightly. Which makes sense as the market was down on Tuesday. That's what the commercials normally do they buy weakness and sell strength.