A financial blog on investing in stocks, commodities and the gold bull market.
Wednesday, October 1, 2008
gold: the pros and cons
Today I'm going to reprint part of last nights update.
The question is whether gold's recent explosive move was the start of another leg up in an ongoing secular bull market or a counter trend rally in a cyclical bear market.
Here are the Positives:
Gold has rallied strongly back above the 75 week moving average. The COT recently gave us an extreme bullish reading. Physical gold and silver are in short supply. The Gold:XAU ratio is at levels that have signalled good buying points for miners in the past.
Now the negatives: Gold is still clearly making lower lows and lower highs. The 50 DMA has plunged below the 200 DMA unlike any other time during the secular bull market. The dollar rallied strongly yesterday possibly changing the 19 week cycle low to come in at a much higher level than I previously thought. I also thought the dollar would test the 200 DMA before moving higher. Now it looks like it wants to break out to new highs. Gold tested and was rejected by the 62% retracement level. The current trading cycle is only 13 days old. Most trading cycles last 18 to 28 days. With yesterdays decline gold is already close to testing the major support level of $850. If this level fails there will probably be heavy liquidation in the gold market. Gold needs to hold above this level and it needs to do it for the next 5 to 15 days. The XAU rallied 36% from bottom to top, so the gold:XAU signal could already be considered to have worked, so to speak. Now the XAU and HUI are both trading back below the 200 week moving average. Gold and the XAU have both broken back below the 10 day moving average. The miners are threatening to break below the 20 DMA. Most of the gold stocks fit all the requirements for selling short according to William O'Neil . Finally Platinum which has led the precious metal bull both up and down broke through the 06 lows yesterday.
There you have it. The pros and cons for precious metals. Everyone can make their own decision as to how they think this will play out.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.