Archive for September 2010
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In Market Analysis on September 27, 2010 at 6:40 pm
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At the end of July I published a series of articles calling an important buypoint in precious metals. To see my archived article from that point click here http://goldstocktrades.com/blog/2010/07/21/trading-method-signals-buy-gold/.
In these articles I mentioned a target of $21 by the end of the year. Right now silver has reached that target after making an explosive move higher. Silver has made a 15% gain in 5 weeks. I have found having targets and taking profits at overbought conditions is crucial in a trading strategy. As a trader it is of primary importance to understand long term trends and in a bull market to add to positions when they are on sale and take profits when it is receiving a premium. Using oscillators to determine warning signals to buy and sell are extremely helpful but needs to be used carefully. Breakouts could lead a momentum indicator to stay at an extreme ratio for an extended period of time which is the case for silver and gold at the moment.
Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies. 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.
The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.
Silver’s move has been parabolic and is very overbought. A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support. It has had 5 up weeks with a 15% gain from my buy signal at $18.30. It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely. To enter at this point would not be prudent according to my strategies.
Instead there are some miners who are coming out with great news that are oversold at the moment. I believe these miners will outperform even if bullion corrects. Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold, Kinross buying Redback, Continental Minerals being bought out by Jinchuan Group . A weak dollar combined with emerging market growth will cause more interest from overseas to buy natural resources. Base metals have been performing very strong. There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days. Most of the gold and silver miners I follow have resources with low cash costs and close to infrastructure. A lower gold and silver price will not impact these miners as much as other miners with higher cost projects.
To find out about which specific stocks I am researching go to my website at http://goldstocktrades.com.
Disclosure: I own gold and silver bullion and mining stocks.
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In Market Analysis on September 22, 2010 at 6:14 pm
The Federal Reserve declared war on deflation Tuesday, stating that they will provide additional accommodations should any deflationary signs occur. I wrote several weeks ago that Washington will provide the relief necessary to rescue markets before the November election. Please click here to see article.
President Obama is in the process of changing his entire economic team before the election while voters are expressing concern and outrage over high unemployment and the real estate foreclosure crisis. There concerns are valid as our unemployment rate is much higher than reported. Although published economic reports should be studied, the most important criteria is price action because that shows the true supply and demand of the global market.
There are additional ramifications of yesterday’s statement from the Federal Reserve. China and Japan have a seriously appreciating currency versus the dollar. The dollar is gapping down to new lows. Usually a weak dollar has been bullish for stock markets as investors were less risk averse. However, I don’t believe this will be the case this time. Sovereign nations are extremely concerned of the devaluation and are scrambling to stabilize their own economies. I believe this devaluation of the dollar will have an impact on emerging markets ability to grow and we could continue seeing a fallout of a deteriorating U.S. currency. 
Recently the S&P 500 has made a significant rally and many are calling the concerns of several weeks ago overblown. I am still unconvinced. One reason in particular stands out, there has been no breakout of resistance in housing stocks. The homebuilders index etf (XHB:NYSE) still has not broken through the 200 day moving average to the upside. The 200 day Moving Average is a key long term indicator of trend by investors and mutual funds. It appears that the momentum indicators are signaling that it may actually encounter resistance and turn lower.
Until I see a move above $16 I am still unconvinced that our economy has improved. It failed at the end of July and is approaching key resistance here. The amount of defaulted homes coming on the market are immense and climbing. There are millions of defaulted homes on the market. This may take years to work off.
Monitor the chart of the homebuilders closely and wait for a confirmation breakout before getting excited about this market. There is way too many bulls at the moment and would not chase this overbought market. I believe a correction is close at hand and this rally may be a trap.
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In Market Analysis on September 20, 2010 at 5:47 pm
Since the emergence of the European Debt crisis in April 2010, treasuries have been in a strong uptrend as investors have been seeking protection from risky assets.April to August 2010 was a deflationary period, similar to the fourth quarter of 2008 when treasuries soared higher before the massive government stimulus. Stocks have been in a five month correction. Now, in September 2010, long term treasuries are suffering a correction and break of long term trend support.
Long term treasuries are unable to find support at the 50 day moving average. I highlighted a few weeks ago that treasuries appear to be making a top as the Chinese cut back on U.S. debt. The massive efforts from Washington to prevent a double dip appear to be putting a respite in the decline in equity markets. It also appears that The Fed will continue to easy monetarily during this crisis as they meet tomorrow and is expected to accommodate further. The Fed has already stated that they will keep interest rates low well into 2011. This is very bullish for silver and gold.
Efforts to deflate the currency have succeeded and now the dollar is challenging new lows and breaking through support. Treasuries have corrected considerably along with the dollar. Although the policy makers in Washington have revived the equity markets, the long term effect on the dollar and long term debt will be detrimental. The markets are at resistance now and are very overbought. I would consider being careful on this rally as a deteriorating currency and high unemployment will put pressure on the consumer.
The precious metals long term uptrend is in fact the best place to be during this ongoing debt crisis. Now there is a massive flow to silver and gold. I would not go chasing it now with the masses. There will always be corrections and sales on gold and silver in a bull market as I highlighted to my readers four weeks ago right before the rally. Silver is especially overextended and could have a healthy pullback. There will be sales in the future as profit taking is imminent as it is overextended over its 50 and 200 day moving averages. Subscribe to my free newsletter for trading signals and strategies at http://goldstocktrades.com.
It appears that the strategies from the central bank are now reflating the economy as gold, silver and base metals have reached new highs, while the dollar and U.S. treasuries are correcting considerably. I believe the trend of sovereign debt defaults will continue and central banks raising their positions in precious metals. This is the beginning of a major rush into gold and silver
We are currently seeing a huge transfer of capital into gold, silver and mining stocks. I believe the best way to invest in emerging markets is to buy gold, silver and base metals that these countries are now importing rather than exporting. I also see the possibility of the equity market, dollar and treasuries decoupling from silver and gold as they have made extremely upside breakouts since our bullish call on precious metals at the end of July. It has made an explosive move and is extended way above support and moving averages so a pullback is inevitable. I am a long term silver bull but at this point would wait for a healthy pullback and secondary buypoints will be alerted to my readers first at http://goldstocktrades.com.
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In Market Analysis on September 15, 2010 at 5:42 pm
Gold broke out of a classic cup and handle pattern yesterday right before the Bank of Japan announcement. The Yen has significantly strengthened since June as this is extremely difficult for the Japanese export companies. The economy in Japan is weakening and they are facing their own sovereign debt issues which have not yet surfaced. However, what is more important is how the markets are reacting. This reaction in the yen may be short lived. Although it might be a short term bandaid the intervention efforts may be too little for the global forces of supply and demand. There is little support for the dollar as evidenced by the U.S. Dollar Chart.
Today the selling in the yen did not transfer to purchasing U.S. Dollars. It seems as though yesterday and the past several weeks there has been a major rush into precious metals. The dollar’s chart is giving warning signs of an imminent collapse. Certainly the dollar has not reacted positively to this announcement.
The dollar is slicing through its 200 day moving average and the 50 day clearly has acted as resistance. A major transfer of dollars into precious metals are occurring. A death cross is imminent on the dollar and this is occurring simultaneously to a new high breakouts on silver and gold.
Usually a weak dollar has been bullish for stock markets as investors were less risk averse. However, this is not the case this time. Even though the dollar has fallen since June the markets have failed to rally significantly. Instead precious metals and mining companies have broken out of key resistance.
The S&P 500 has been in a sloppy and volatile base for four and half months. The poor price volume action tells me a breakout above $114 is highly unlikely. A third failure may be imminent as overbought conditions are combining with previous resistance.
This cup and handle pattern in gold is extremely bullish and could be the beginning of a next leg higher. It is a sign of a major consolidation and this recent breakout may bring in more investment interest by institutions who are concerned about currency and sovereign debt issues. A major transfer of capital is moving from currencies, bonds and equities into precious metals.
To see my recent prediction of this breakout move click here.
Gold’s (GLD) pattern is very rare and this setup tends to indicate a major move into hard assets.
If we see a decoupling of the dollar versus gold continuing, expect to see more buyouts of resource companies from Asia. Right now we are seeing a massive transition of wealth from the dollar to silver and gold.
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In Market Analysis on September 13, 2010 at 5:38 pm
Price volume action is showing weakness on this rally and there is a good chance we could see a third failure at the 200 day. Many times, before bear markets ensue you can encounter three or four failed rallies above the 200 day before the primary bullish trend is reversed. Markets take time to transition from a bull to a bear market. Bullish mania wears down as repetitive failures shows a market that is losing confidence. On each subsequent rally the amount of bargain hunters dwindle. Price volume action is poor on this rally attempt. If we see another failure- which I believe may occur- we could see a major trend change.
Stochastics have been really accurate in this rangebound market. Oscillators are most valuable in trading markets, not trending. The S&P currently is a trading rangebound market while precious metals are in a steady upward moving trending market. Since May the SPY has been in a trading range that only would have been profitable if one used oscillators. On the other hand, in trending markets like gold which is in a steady uptrend the use of oscillators or stochastics should be secondary as those conditions shift as new high territory is reached. In trending markets it is more important to rely on moving averages and trend support to make buy or sell calls.
Be careful of selling gold or silver solely on overbought conditions. Gold (GLD) and Silver(SLV) are in very bullish patterns breaking out into new highs in an upward trending market. Whenever you see a breakout into new price territory on strong volume, momentum indicators need to be relied upon less. Gold and silver have both shown tremendous relative strength and I believe will provide continued safety during a market downturn.
I believe gold and silver will continue to perform strong compared to other assets. This summer has been hard on the equity markets and quantitative easing has been necessary for the Federal Reserve to maintaing momentum in this market. New job growth has been weak and we are not out of the woods with the European Sovereign Debt issue. Junior mining stocks who are translating cash into resources is where I want to be at the moment as they have held up well during this summer correction.
Gold is finding support at the 4 week moving average and is forming the handle on the cup. I believe gold and silver could have a very strong rally as the general public becomes aware of the junior mining sector and the value of gold and silver as an asset class.
Disclosure: Long Gold and Silver Mining Stocks
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In Market Analysis on September 7, 2010 at 2:27 pm
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In Market Analysis on September 3, 2010 at 6:37 pm
Point and figure charts are one of the oldest and purest charting methods in the field of technical analysis. Point and figure charts are not commonly studied and practiced by technicians today as in the past. However, I use it as a simple indicator of areas of supply and demand and to indicate new trends. Warren Buffett said, “There seems to be some perverse human characteristic that likes to make easy things difficult.” Especially in the field of technical analysis, analysts seem to love making complex formulas when in reality it is completely unnecessary.
Point and figure charting is a simple method of plotting price alone. It helps the chartist understand support, resistance and specific congestion areas. Congestion areas are areas of price where there was a previous battle of supply and demand. Often times when the price reaches this area it is difficult to break through. However, when the breakout does occur a major move begins. These charts are excellent at identifying specific price and relative strength breakouts.
Silver has just made a triple top breakout which signifies a possible major trend higher. Triple top buy signals are very powerful and hint at a move higher. Unlike bar charts projections are based on a horizontal count rather than vertical. This silver triple top breakout which may occur shortly could initiate a rise to $27. This target is also confirmed by the bar chart analysis which I showed on Sunday’s update. On the point and figure relative strength chart a breakout has already occurred.
Usually relative strength breakouts precede price breakouts and confirm the move higher.
Never in history has the gold to silver ratio been so high and a reversion to the mean could mean a significant move in silver.
Disclosure: Own silver and silver mining shares.
Silver’s move has been parabolic and is very overbought. A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support. It has had 5 up weeks with a 15% gain from my buy signal at $18.30. It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely. To enter at this point would not be prudent according to my strategies.