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Posts Tagged ‘precious metals trading’

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Be Careful Chasing Gold and Silver, Overbought Condition Could Lead to Correction

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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Head and Shoulders Pattern and Rising Wedge on S&P500

In Market Analysis on August 23, 2010 at 7:38 pm

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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.

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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.

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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.