Trading against the market herd, also known as going contrary can be quite profitable, but timing is another challenge entirely . Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them. Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.
In these past few weeks since my article on the death cross and why specifically this cross is quite bearish due to other technical signs, I have been bombarded with emails and links to Barron’s and Marketwatch which claim the death cross when back-tested is a contrary indicator with no statistical advantage. Word to the wise, be careful of what you read in the widely published media reports. A technician worth his salt knows if a death cross is real and if you need to be wary of a market downturn, similar to the market decline of 2008.
Remember that Barrons, CNBC and MarketWatch are in the business of advertising, which depends on their circulation. Many of their ads are supported by major corporations who want their readers to be bullish rather than bearish.
What has concerned me lately in gold was the amount of media promoting the possibility of gold skyrocketing during the recent Sovereign Debt Crisis, where many fled the Euro to buy treasuries, the dollar and gold. Today there was speculation that may threaten banks who are not lending. This is becoming a deflationary crisis and investors are now concentrating on treasuries. Mortgage rates are at all time lows, lending is drying up and housing starts are plummeting. There are worries about U.S. Debt, higher taxes and increased government intervention in the private sector. This shakeout in precious metals is giving investors another opportunity to jump into this bull market without being caught up in the hysteria. To enter the trend with additional capital, it would be wise to buy when the conditions are oversold.
I have written about the use of oscillators to show short term buypoints in an uptrend. I am seeing this happening again with gold. Gold is about to hit an 18 month trend line, which has been successfully tested 6 times. This is a valid and significant trend line that needs to be monitored closely. Oversold conditions coupled with long term trend support leads to highly profitable times, as indicated in the chart below.
While learning to trade, I was taught to be a patient lion waiting for the best possible opportunity to pounce. Lions wait intently until they are sure of optimal results: a profitable trade. Now as a trader of gold and silver, I see opportunity approaching. The best way to play this market is by buying gold and silver when it hits the lower support trend line and is oversold, and selling as it approaches the rising resistance line. This rule forces you to enter when the conditions are oversold but still in an up market, giving you very minimal downside risk. Each time gold has rallied into new highs, the first correction to that trend line has been the counter trend bottom in the next major move.
Investors should be concerned if there is a break in that trendline as it has proven to be valid over the past 18 months. There are many similarities with silver.
I believe silver is a great buy here at $17, especially as this is a true deflationary hedge. Eventually the public will want real money, which is gold and silver. Silver has the possibility of making a major run as it is way below all time highs. During this time when it is oversold and coming in play with long term support, I would position myself for a move higher from the $17 area to $21 by the end of 2010.