Gold and silver are falling.
Two of the most over loved, overbought markets on the planet, are going down. What fortune awaits the holders of these barbarous relics. Will they go the way of oil, after it reached $145 and was never supposed to see $100 again, let alone $30.00. Is another crash like we saw in 2008 coming? Have the inflationist made the mistake of their lives?
If you own these products or the stocks of the companies that dig them up, you are probably wondering what comes next.
The people that invested in gold are acting pretty smug right now. Laughing and mocking Bernanke. Talking of sending him thank you cards and cheering his incompetence. That is ok if the gold has been sold and the money is in the vault. However, if you are still holding the bag, be aware, the fates do not always smile kindly on gloaters. So do not cavort too long, or laugh too loud.
Everyone is on one side of the boat and the boat is listing badly. If it flips and you go in the water, the hungry sharks may still eat their fill.
Rather than pejorative rhetoric. At times like this, it makes more sense to watch our positions and keep our fingers on the purse strings.
So far the sell off is on track
I called the top in the metals market (please see FSN article, What is wrong with gold) and I gave my prediction on how the move down would unfold. I thought I would follow up on that call and talk briefly about using cycles to trade with.
Below is what I wrote on December 21 2010
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I am looking for another quick swing toward the highs, that may reach above 1400. Then I expect a swipe down toward the October lows (128ish). That is where I will be backing up the truck. I also have a strategy to make sure that I don't get left behind if the markets start the new up leg early.
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Below is the chart I posted at that time.
Lets look at what has happened since.
I have highlighted the price action since the last article in red. We held the 1 month low and rallied to 139.00 forming a triple top. We exited our long positions in the 138 area. Since then, the bigger cycles have started to dominate. We have started the swipe down that I was looking for when I wrote the first article in December.
How far we fall in this correction remains to be seen. I originally had a target of 128.00. That target is still valid, but because of the extreme bullish sentiment that preceded the turn, I will keep an open mind and let the market show me where to enter. It is possible that we revisit the lower 120 area, if enough traders panic or get squeezed by margin calls. We can also hold higher as well.
Notice that the two patterns on the lower chart are similar. They both had the same up sloping pattern. They both turned down after trying the highs 3 times. That is an example of how to use a fractal. The last low was a 1 year low. The low we are making now, is a 6 month or half year low. One thing to keep in mind, is that a 6 month low can be quite large. My point is, do not underestimate this cycle's potential to scare many traders out of their positions. Remember the boat can flip easily.
We are here.
The purple arrow in early January is a good "you are here" marker.
The purple arrows also mark short term cycles, that can give a fleeting uplift to the price. They tend to come in around the release of the jobs data early each month. They can be seductive, causing a false start for traders eager to join the precious metals gravy train. I have marked a false bottom with the orange arrow in the July time frame. Notice there was another one later in the month.
So far, it does not look like we are finished with the down side.
Bottom line
It still looks as if the up trend is intact. The next week or two should be a time for hand sitting. I will be leaning to the long side as we approach the next options expire, on January 21.
Missing the exact bottom is not a big deal here. It is more important to be sure it is in. After it turns up, there will be 2 or 3 months of upward movement to profit from. Plenty of chances to enter.
After a powerful multi-year rally like we have seen in gold, we should not end the bull move with a V top. In the bigger scheme of things, a failure and collapse here would not look right.
We are also in the third year of the presidential cycle. I went back to 1965 and looked at the price data for the S&P 5oo. Every third year went higher than the previous year. There was one year that had a nasty clunk in the middle, but that was after a huge ramp up to new highs early in the year. I know gold is different than the stock market. However I have trouble imagining a strong year in the economy and the general markets, without higher commodity and metals prices. There should be higher prices in the spring, before we turn lower into the summer.
Devil's advocate
By hammering down the gold mining stocks, just after what should be a very profitable year and just before those earnings are announced, the Fat Boys seem to be giving us free money. I have to ask. Why. They don't usually give out free money.
Keep in mind that it is possible to drown in a river that averages six inches deep. Always use stop loss orders. I never trade without one. Ever. Preserving capital is rule number 1.
If we are going to break hard to the down side, this is where it will happen.
Also keep in mind that Bernanke is a front man for some very nasty, powerful people. Mock Bernanke if you choose, but be very watchful of the ones that control him.
New traders find cycles magical
I use cycles to trade, but they are not a panacea. I use them as a guide, but they are only part of my trading methodology. They can shift or skip entirely, leaving us at the dock, or worse boarding a ship just before it sinks. I always caution new investors and traders not to be overly reliant on them.
In my courses and videos, cycles make up a small part of what I teach. It is much more important, to know how to find the trigger points that the Fat boys use in their algorithms. You have to understand market structure and manipulation to be a profitable trader.
I offer one on one, learn to trade courses. There is also a powerful video set available. Both will get you on the right track in the new year. It is the same track the Fat Boys are on. They control the markets and if you are not with them, then you are a victim.
Please visit my blog and let me help.
