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“In
times like these, it helps to recall that there
have always been times like these.”-Paul Harvey
Everybody loves a bull market especially us
gold lovers. However, prices never go straight to the sky
as they must periodically pause and rest a little while some
of us take profits off the table from time to time. Unless
you have been a market watcher for several years, the hourly
and daily market volatility and noise can make you crazy.
We have some ideas for traders and investors to by-pass these
distracting things and remain focused on gold’s big
picture.
This gold chart showing periodic channel extremes
(circled) is quite typical of several market patterns; not
just gold. Like clockwork, in March and April, gold bounces
to the outer edges or extremes of the upward price channels.
Within each of those circled price
bounces note as we go forward in the rally, each succeeding
top was a little bit lower, patterning a tiny weakness in
rally price. Then we see our most recent circle price
for 2006 bounce from support and jump
up and out of the channel in a higher rally.
These conditions are showing us that as time
and price move forward and upward gold can get tired and go
flat as buying pressures tend to wane. A tiring market is
saying we simply ran out of gold buyers during that period
of time. Our time span from late winter in 2005 until the
following August caused anxious gold bugs to fret about the
market being over. Nothing could be
further from the truth! The assurance we have that
gold will continue to rally is those two channel lines. Unless
the bottom line is decisively broken with dropping prices,
gold remains within its rally boundaries and we can be assured
our gold rally shall continue.
I know of an old time trader and investor in
Chicago who has been trading his entire adult life and primarily
relies upon those two channel lines for his pricing guidance.
His attitude is to keep it simple and stick with your plan.
As long as prices are in the channel he sticks with his trades
permitting investments to progress naturally. He founded one
of the largest and well known futures brokerage operations
and regularly practices what he preaches to others.
With prices showing us distinctive patterns
within those circles we can determine
selling sessions are generally on time agreeing with the calendar.
Further close inspection can show us when the first gold rally
leg was completed. This phase one ran from an April bottom
in 2001 through the end of 2004. After some corrective selling
in 2005 we are now beginning the second and more powerful
phase of the many years’ gold rally. This is observed
as price blew out and above the top channel line in early
2006. Just as our rally seemed to tire, prices exploded upward
with new strength providing confidence the buyers had returned.
Each spring headed for summer, gold moves sideways
and slightly upward on a bias, trading within a continuous
range. Each succeeding gold leg (we are now in leg number
two) will grow with buying power and intensity as more new
buyers enter the gold market. The first leg is the stealth
leg where very smart, hard core precious metals analysts,
traders and investors can recognize initiation of a new rally.
More importantly they immediately have the nerve to put hard
cash on the line and buy gold. The gold investment group has
been out of favor for several years and memories are short.
It takes a great deal of convincing in an early bull run that
our gold rally is for real.
Slowly but surely, much bigger investors including
the funds realize gold’s potential and cash arrives
at gold’s doorstep in ever faster and larger amounts.
You can detect this higher interest as daily trading ranges
move from $1-$3 up to $10-$15 range days. This is the kind
of new investment that created the jumping rally, forcing
gold’s price above the top channel line.
Admittedly, the price range between those gold
chart channel lines is a whopper. Seeing 100 points of price
between $450 to $550 before the event
is visually apparent is difficult to believe and very
hard to digest. It takes a clear conscious and strong resolve
to become a long gold buyer. Today, we are within the next
new circle period indicating gold is going to sell and retreat.
Precious metals aficionados are quite attached to gold and
never want to see any serious selling in their favorite market.
We must recognize however, that periodic profit taking is
both normal and desirable or how else do we get our money
out and earn some good bucks? Those CNBC cheerleaders who
scream buy and hold forever provide great amusement but somewhere,
sometime, you have got to take profits or this whole business
is just a silly and very expensive exercise.
We are not saying you must be active day traders
or even weekly swing traders jumping in and out of gold futures
and stocks like a jumping jack. That is a game for screen
watching pros not the rest of us in this gold business. Rather,
we suggest dividing the year into two repetitive, normal,
substantial rallies. The first is August to Thanksgiving.
The second arrives late in December or early January continuing
through March. Buying and selling twice a year to participate
in those two main gold moves provides us with most of the
longer view upside moves. Can you buy, sell and trade gold
12 months a year? Yes, you can but in our view, gold investing
is a serious business requiring substantial investment and
therefore not a game. In our newsletter we offer short, intermediate
and longer term investments for all kinds of investing styles.
But, today, we are discussing what we feel is the least risky
gold idea while providing a strong upside opportunity for
the majority of gold market investors.
We prefer to use gold and silver stock call
options for shorter term trading which have proven very effective
for us providing handsome returns. If you can technically
track cash gold and its futures moves, you can trade these
options and earn 100% to 300% in 30 to 90 days. The underlying
stocks must only move a little to gain expansive option leverage.
These tools are for active traders. We know of one trader-investor
who maintains two gold brokerage accounts. One is for his
core holdings which are rarely traded or sold. The second
account is used for trading gold and silver stock call options.
In very active instances, you might have a third futures brokerage
account dedicated to trading gold and silver futures
and options on either the Comex in New York or the CBOT in
Chicago.
Occasionally someone will e-mail and ask us
questions about shorting gold futures or stocks. While this
can be accomplished and you certainly can make money doing
it, we do not recommend shorting any market that has a long
term bull frame around it. Every once in awhile, in what ought
to be a selling period on the calendar, (like today 3-1-06)
gold will produce a very nice rally move. Even with proper
stops, a shorting trade is just scrambling against a rally
headwind in our view. One of our very experienced colleagues
trades gold futures long twice per year on each of those large
semi-annual rallies. He is quick, smart, experienced and rich.
He has powerful instincts for entry and exit dates and most
often is very close to tops and bottoms. While he trades and
invests in most all the gold products
including stocks, options and futures, to my knowledge he
never, ever tries to short this market. Considering he is
a multi-millionaire and is a Senior Vice President of a global
investment bank, this should tell us something about strategy.
We have another friend who is managing director
of a gold fund in Europe. I asked him recently if he was able
to sell any of his gold stocks before the latest market downturn.
He told me he elected not to sell anything, as he expected
this latest down period to move in more a pausing, shallow,
sideways pattern and felt it would be unforgivable to be out
if gold took off in a premature rally. Since his fund owns
many shares and several of the stocks are in junior gold companies,
we think his decision is a wise one. To exit even ½
or a 1/3rd position in that many stocks would, in some respects,
be self defeating. Selling juniors in big volume would virtually
ensure bad exit fills and possibly strong losses. So it depends
upon your own situation. Another consideration is taxes but
that is best addressed individually with accounting and perhaps
tax legal advice.
In summary, we strongly encourage our readers
and gold investing friends to focus on the sections of time
which reoccur each year. The two semi-annual rallies could
conceivably change as gold receives more buying pressures
and the trading ranges for days, weeks and months grow more
intense. However, even under these circumstances gold investors
will exit with profits or losses as this is a normal part
of all markets. Smart investors plan several months in advance
and are skilled in using the calendar and time. After all
the talk and daily dust-ups, you can always count on high,
low, open and close. And when you are ready to exit in disappointment,
use those channel lines and work with the longer term weekly
and monthly charts to rule out daily charting blips which
could create mistakes.
In our opinion, the more successful gold
traders and investors allocate a partial portfolio as being
the long hold core group. These dollars stay invested except
for removing ½ for profits after a good rally; or finally
selling it all at the end of what we think will be the longest
and greatest gold market boom in modern times.
Roger Wiegand,
Editor, Trader Tracks
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