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.

Gold and silver has been a safe haven asset.  Many concerns were expressed if miners would collapse in a weak equity market.  However, since the last Federal Reserve meeting, gold and silver has shown impressive relative strength compared to the overall market. The Federal Reserve discussed the increase of treasury purchases to keep interest rates artificially low. They also made it clear that every attempt will be made to prevent deflation.  This low interest rate environment and weak economic outlook which may continue for some time has encouraged investors to move money out of equities into safe haven assets such as gold and silver.  Gold and silver is also gaining interest as investors are realizing bond yields are too low and may be risky at these level.

The Fed’s greatest fear is deflation, high unemployment and a move into new lows in equities before the election.  If the S&P continues to deteriorate and unemployment data comes in negative, I expect an announcement of more central bank interventions to reflate the economy.  This next round of quantitative easing could cause a massive rush into gold and silver.

Many are concerned of the safety of fiat currencies during a global debt crisis.  The global economy is built on spending and investing.  Many investors were concerned if a downturn in the equity market would drag down junior miners.  These past couple of weeks have proved that is not the case.  Junior miners have made major moves higher.  A breakout into new 52 week highs in the miners is highly probable especially as the price of bullion breaks out.

The saucer (cup) and handle pattern is the chart reader’s favorite pattern.  Great performing stocks tend to have a strong base before an extended move.  Gold’s (GLD) pattern is very rare and this setup tends to be very profitable.  Similarly to what we saw in September of 2009, I expect a major breakout.  Is this pattern showing investors that a major event may be brewing?  Time usually tells the tale as news or events are announced after the breakout.

High quality gold and silver explorers are making major moves already.  It is important to pay attention to the gold and silver junior miner sector as we may be setting up for peak gold and silver.  High quality explorers with mineable assets should be followed as gold and silver discoveries are rare and producers are paying a premium for these properties.  These miners tend to have great leverage to the price of bullion especially if we see more government interventions and quantitative easing.

Yesterday, Fronteer Gold, a stock that I have recommended to my readers bought out Auex Ventures to control completely the Long Canyon Project.  The Long Canyon discovery is high grade and open pit. Fronteer is consistently coming out with impressive results from this project.  Long Canyon represents continued resource growth as it is expanding and open in all directions.

A major move in bullion could cause these explorers to make large percentage gains.  If you haven’t researched high quality junior miners yet, now is the time before a major move.

Disclosure: Long Gold and Silver Miners

We have seen a trend of investments from Asia to purchase stakes in mining companies.  In 2009 the Chinese Investment Corporation, a state owned company, took large ownership positions in Teck Cominco and Penn West Energy Trust. Recently in June, China National Nuclear signed a contract with Cameco to supply 23 million pounds of uranium.  Hanlong Investments took a large stake in General Moly, one of the leading North American molybdenum developers.  Korea Electric Power signed a deal with Denison Mines another uranium developer. Sojitz bought a 25% interest in the Taseko’s Gibraltar Copper Mine. Then recently we saw BHP Billiton trying to make a deal with Potash Corp. and Kinross, a large producer buying Redback, an exploration company.  This trend should continue through 2011.

Investors should be studying the companies that are receiving premiums and position themselves accordingly to make potentially large profits. Junior mining companies that are sitting on large assets that are still relatively cheap or overlooked should be considered.   There are still many companies with strong assets that are trading way below value.  This is an exciting and highly profitable time for the companies with assets close to production in the mining sector.

For producers it is more efficient to acquire explorers to replace their reserves rather than rely on their own exploration team.  I am focussing on the junior mining sector whom are close to production rather than the large producers as they will receive large premiums on their assets.

Following the mining sector on a daily basis the evidence of keen interest to acquire resources is apparent.  There is a search for real assets and natural resources.  Foreign countries are looking for natural resources to diversify their holdings and supply their emerging economies. Large mining producers are searching for replaceable reserves of gold, silver and industrial metals.  As the U.S. attempts to reflate their economy at all costs, precious metals and natural resource assets should receive a premium.

The Gold Miners are close to a major cup and handle breakout.  It also appears to have set up an ascending triangle pattern.  A breakout from this pattern could lead a major move into new high territory.

The strong trend in gold miners is signaling that interest rates will stay low as the Federal Reserve makes every attempt to reflate the economy.  Precious metals prices should stay high which would make producing mining companies highly profitable.

Disclosure: Long Gold and Silver Mining Stocks

Gold has reached overbought conditions from my July 28th buy signal.  Right now gold is a bit overbought while silver is at an interesting buy point, having found support for the fourth time at its long term 200 day moving average.  Today’s breakout of the symmetrical triangle, a very bullish chart pattern, is a sign that silver has built up a lot of internal strength and could break out into new three year highs. Remember, silver is significantly below all time highs while gold has already broken into new highs.

While I am bullish on gold, I believe investors could see a higher percentage move in silver.  I have also alerted my readers to a specific  mining company which has recently found a major discovery in Mexico.  Pure silver discoveries are very rare.  Silver supply is mostly produced as a byproduct which makes supply very inelastic.  A new pure silver discovery in a silver bull market could receive a nice premium.

I believe silver will make a major move on this break out. Investors are looking for a safe haven, protection and value in silver.  Gold has already made a significant move and is quite overbought, while silver has not participated to the same extent.  The gold silver ratio should move to historical norms which could mean a major move for silver.

If you do a study of the point and figure chart of the relative strength of silver versus the S&P500 since 2001, its strong uptrend is apparent. Each time silver falls back into support, it breaks out and makes significant rallies.

The break above the red bearish resistance line and a double top breakout coupled with the daily chart symmetrical wedge pattern demonstrates that silver has reached a critical juncture and could make a nice move.

The rise in equities from March 2009 to April 2010 lacked one key ingredient in a bull market: volume confirmation.  There were many technicians who pontificated why the lack of enthusiasm of the uptrend existed.  Some said that it was the 2008 de-leveraging of hedge funds that caused the decreased participation.  I was never convinced of this far fetched  argument because on each correction volume increased significantly.  I’ve been skeptical of the claim that this time will be different. While studying charts over the years, one indicator I am always loyal to is volume.  It is the enthusiasm in a market which shows if a rally or decline is convincing.

The H&S pattern is one of the most reliable chart patterns.  The S&P 500 is showing an apparent head and shoulders top with volume confirmation. One way of affirming the validity of this formation is by checking the volume on the right shoulder, because  the right shoulder is the first rally in the bear market.  The low volume shows a lack of confidence in the previous bullish trend.

The sharp breakdown of the S&P 500 following after the rising wedge pattern tells me that this bear market is likely to continue. Several indicators, namely the bearish death cross, break in trends and poor price volume along with the bearish head and shoulders pattern and rising wedge all combine to weigh heavily against equities.

GLD is experiencing a “v” formation after coming to long term support and a 50% fibonacci retracement.  On July 28th, many of you have read my views and why I believe gold was at a buypoint, contradicting the consensus of market timers at the time.  Now I believe gold is in need of much needed respite in the trend and a shakeout before continuing into new highs.   Gold buying has also gotten some TV airtime from a few famous commentators who are now turning bullish on the metal.  That really concerns me, as it is a contrary indicator.  We may see a healthy correction so that GLD can clear the previous resistance and make a move into new highs.  A healthy correction could also provide an excellent market entry point for a trader who wants to add to their gold holdings before a new breakout.  If you study the move into new highs from September of 2009 you will see the coil formation where it had three pullbacks to support.  These formations are bullish as they provide the conditions to generate a high percentage move.  For specific stock selection visit my website at http://goldstocktrades.com.

GLD is overbought and if you are trading short term, do expect a pullback to at least the 50 day moving average to find support or possibly shakeout the traders who bought in after it crossed the 50 day moving average.

Today’s break of the 50 day moving average was a key move as the probability of the 50 day moving average to cross the 200 day moving average to the upside is diminished.  Many were concerned that the bearish death cross would be a whipsaw, meaning markets would revert higher.  However, the bearish death cross is becoming more confirmed and pronounced as the 200 day begins sloping over.

Stocks key technical break today of the 50 day moving average on high volume shows there is little support as the risk appetite wanes.  The rally in treasuries are showing signs of a double deflationary dip, similar to the 2008 bear market as investors fear that the economy is on shaky grounds.

I believe that the chances of S&P moving into new lows are very high.   Today’s break of the 50 day moving average is confirming both the bearish head and shoulders pattern and death cross.

The S&P market action is demonstrating that the two day rally above the 50 day was not strong enough to maintain support.  Now the 50 day will once act again as resistance.  Volume did come in higher signaling major distribution. However, when a market transitions from a bull to a bear, each subsequent failure at the 200 day drives out the bulls who still believe that the decline is a buying opportunity.  After the third or fourth failure usually a full blown bear market begins.

Despite the Fed’s promise to amp up the struggling recovery by flooding the markets with cash and the latest jobs bill from Congress benefiting government and union employees, their major constituents, investors are losing confidence in Washington’s attempt to prevent another bear market.  I expect a breakdown into new lows over the next few weeks.

Despite all the weakness in the equities market, many mining stocks I am following closely are breaking out as gold is on its way to test new high territory.

Fronteer Gold which I have highlighted to my subscribers came out with their best drill results yet at their Long Canyon Project.  This project is being viewed as one of the great new high grade gold discoveries in Nevada.  These results in Nevada will be part of a new resource estimate on this project which should be a driving force for this company over the next few months.

There seems to be a major investment shift away from treasuries as the Chinese are skeptical of the U.S. debt situation.  The Chinese are looking to make strategic investments in natural resources.  China may not be public about their policy move, but they are taking significant steps to increase their position in mining and energy companies.  In 2009 the Chinese Investment Corporation, a state owned company, took a large ownership position in Teck Cominco and Penn West Energy Trust.  They are looking for mining stocks to diversify their holdings.  This major policy shift from Asia transferring assets from U.S. debt to natural resources could spread. We could soon be seeing a top in U.S. Treasuries and more acquisitions for premiums in the junior mining sector.  In fact, a couple of the companies I followed last year had major investments from Asia. As demand has exceeded supply,  they have been compelled to import certain commodities such as uranium and molybdenum rather than their traditional role of being the exporter.

Treasuries have made an enormous run, but the recent gap up and reversal could mean that it has exhausted its move and may be headed lower.  This gap up and reversal, which made railroad track-like formations in the chart should be observed cautiously.  High activity days with a jump in volume or price call for close monitoring.  The manner in which price reacts to the gap is crucial.  If we see a two-day reversal pattern after a gap up where it closes near the opening of the previous gap, it is a sign that buyers are doubting the previous day’s jump.

Long Term Treasuries spiked higher during the “flash” crash and has proceeded higher for the past four and a half months.  Although a two day price pattern is not reason enough to go short, it does raise a warning bell of caution when combined with the overbought reading.

Now the rally from April is 12.5 percent above the 200 day moving average.  It has also reached its upper resistance line.  As I indicated above, the buying from the Fed and overseas will abate and we may soon be at a juncture where treasuries have exhausted their move.  There are negative divergences with momentum which price usually follows.

China’ s move to decrease their holdings may be starting a trend that could influence other countries as the scramble for basic commodities and hard assets continues. This commodity search should spread to U.S. mining companies, especially as the dollar and treasuries weaken. I expect an increase of acquisitions in U.S. gold, silver and base metal mining companies in the next few years.

The recent Post-Fed free fall is confirming the death cross as this will be the third major failure of the 200 day moving average.  When a technician starts seeing bearish signs, it is important to look for subtle clues in chart patterns.  In this case the clue was the bearish rising wedge: it is a rally that trades up on decreasing volume.  This bearish rising wedge took place concurrently with the right shoulder formation of a head and shoulders pattern. This breakdown coupled with bearish price volume action confirms that selling pressure far exceeds buying. When all these signals happen at the same time, you can expect a rapid downturn to follow.  This correction is putting pressure on the 200 day moving average slope.  If that moving average begins to slope down, it becomes a heavy area of resistance and will confirm the death cross from early July.   The odds of a long term downtrend are becoming highly probable.  These signals could possibly indicate the start of a twelve to eighteen month down cycle.

Gold, on the other hand, has shown great relative strength despite the general markets correcting and negative sentiment about the economy from Washington.  On July 28th, I wrote that gold was reaching major long term trend support and when everyone was selling, it was exactly the time to be buying.  That day proved to be a pivot day for gold.

Gold is breaking out compared to the general markets and especially to the Euro.  It has significantly rallied over the past couple of weeks and has broken above its 50 day moving average which showed little resistance.  Now that 50 day has been broken to the upside, it should act as support as it builds a base to challenge new highs.

Junior mining stocks that corrected significantly in the 2008 downturn have shown great relative strength during these past two weeks, demonstrating that this time will be different.  July 28th was an inside bar day, or Harami pattern,  which shows a loss of momentum of the previous downtrend and reversed higher.  It is clear to see the uptrend and strength of junior miners during these past two weeks as the Fed has made it clear our economy is rapidly weakening.  The Fed will continue to ease and print money which should be excellent for junior mining gold and silver stocks.

We may expect that during this crisis more people will become aware of the benefits some of these explorers can offer to shareholders during a currency devaluation.  Some of these companies are significantly outperforming the bullion and investors should become aware of these strong junior miners.

Despite Washington’s attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a collapse of the markets into new lows.  Yesterday, as predicted, the House created a $26 billion job bill that will supposedly prevent government layoffs and expand the job market for government workers.   Washington is trying to alleviate high unemployment by creating more government jobs.  That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary Census workers and did not accurately reflect the true numbers of unemployed Americans.

Investors believe that sustainable job creation is through small business growth.  The markets, as well as the American people are looking for leaders who will cut government spending and institute tax cuts for small business owners.  Entrepreneurs who are trying to innovate and meet consumers’ demands in a struggling economy should be supported with meaningful tax breaks.  This spurs authentic  growth and innovation.  I expect the market and the American People to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama’s approval ratings dropping to their lowest point in his entire tenure.

The Fed has committed to buying long term treasuries, which would artificially keep interest rates low.  They are desperate to get capital flowing again, but it comes at a cost.  Eventually, markets move back to their former equilibrium and long term trends.  If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long term treasuries will crash.  Right now investors are flocking to treasuries for security and safety.  However, just as the market is losing faith in the Fed’s handle on the economic situation, bond holders will ultimately lose faith in government bonds.  We may see a drop in treasury prices along with continued high interest rates over the next several years and possibly even decades as our children and grandchildren face the burden of credit downgrades.

My fear of a devalued currency and lack of confidence in Obama’s handling of the economic situation are the reasons I am bullish on specific mining exploration stocks that are converting their strong cash positions into high grade copper, silver and gold resources.  I have been following this sector for over nine years. I  gather that during the next five to ten years, precious metals will see a lot of growth as investors seek hard money and hard assets.

Today’s major collapse in the equity market was significant.  Last week, I mentioned that the dollar was extremely oversold and that the Euro and U.S. equities were about to correct considerably.  Today we are seeing the beginning of a new downwards trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and a huge trade deficit.

Yesterday’s weakness in gold was only relative to the dollar and U.S. treasuries.  Compared with the Euro, there are technical signs of a major move upward in the price of gold. We could see a resumption of the market patterns that we saw in April and May when gold and the dollar rallied together as investors were seeking shelter from government defaults and sovereign debt crises. The relative strength trend of gold versus the Euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.

Although Gold was down slightly to the dollar it gapped up today versus the Euro after reaching an important 38.2% Fibbonaci Retracement and Long Term Trend Support.  MACD supports that Momentum has shifted.  RSI Crossed 50 today also a bullish sign.

Disclosure: Long Gold and Silver Mining Stocks

The November 2010 election is right around the corner. As the Democrats praise the federal stimulus and Barack Obama as the savior of the American capitalist system, Republicans who also initiated a bailout now reveal where the money was spent frivolously and recklessly in order to gain votes. Regardless of which party gains power, the fact remains that government spending has increased exponentially and it has not positively effected the job market one iota.  The job market is, frankly, terrible.  Our children and grandchildren are likely to experience high inflation, high unemployment and even higher taxes, the very problems that Greece and Spain are struggling with now.  The only solution the Fed is offering is to throw more money into the system to prevent a downward deflationary spiral.

The strategy of my choice for protecting assets is in quality junior mining companies with great management, a strong cash position and expanding resources.

The European crisis demonstrated that now, instead of the credit crisis being just a private sector issue, entire governments are defaulting.  Due to reckless spending in many areas, these countries have positioned their constituents with a great burden.  Spain is now facing close to 20% unemployment.  There are states in the U.S. that are running huge deficits and in danger of defaulting.  A downturn in a highly leveraged global society such as ours has the potential to be devastating.

In order to for the Democrats to win the November election, they will do everything possible prior to the big day to inflate the stock market. I suspect within the next couple of weeks, we will see a second “jobs” stimulus and quantitative easing actions. They need to act quickly to inflate asset classes, the stock market and Joe the Plumber’s 401k plan if they want a shot in the next election.  A “jobless” recovery  is going to be a major flaw to the Democrats control of Washington.

This rally is not broad based at all, lacking volume and market breadth.  Market breadth tells us if this past rally was broad based, meaning that in a healthy market price corresponds to the amount of stocks participating in an uptrend.  It is concerning when you observe a disparity between the stock price and the advance decline line. This usually indicates a “fake” market, because only a handful of stocks are participating. A sustainable market is one in which many participate.   The advance decline line gives you a clue ahead of time if a rally can endure .

The Nasdaq is lacking broad participation.  The Nasdaq’s advance decline line, which is more correlated for the small cap companies, needs to get involved with this rally before this market turns bullish.  Even though price was close to three year highs, the advance decline line is not nearly the same level as three years ago.  This is a false rally with a few select large cap international stocks moving progressively higher.  The U.S. will enjoy a real recovery when we see small caps participating and moving higher.  Obviously, we are not there yet.

Today’s negative job report could be the catalyst to start another leg down.

Over the next few months we are going to see  formidable efforts by the Congress, the Federal Reserve and the White House to prevent the economic fallout that the markets were teetering on during the European Sovereign Debt crisis.  If  these markets are not successfully restored in time, we can expect a major political change in November.  Has the stimulus really been effective?  Looking at this chart, it appears that this is not the case.

Gold and silver may make a major move in the next few weeks. I’ve said before that gold was at a major buypoint due to long term trend support.  The jobs report was very bullish for gold investors.  The Fed is expected to make another stand and gold, silver and base metals should outperform considerably.

Disclosure: I am long gold and silver mining stocks.