Okay, here we go…"THE CHART part II."
“The Chart - part II.”
Many of you agree with my take on charts and technical
analysis, and some of you don’t (which is fine). The debate
over TA is endless and we can do that another time. Today,
I’m going to share my take on TA and what conclusions we
can draw about gold stocks – here and now.
In a nutshell, my main point about technical analysis
is simply this:
TA does not and can not work - in a vacuum.
By and of itself… technical analysis is worthless.
Always has been and always will be.
And it doesn’t matter if it’s French Curves, Bollinger Bands,
Stochastics, Candle Sticks, Point & Figure, Fibbonachi, or
E-Wave analysis.
And it doesn’t matter it it’s done by John Bollinger, Robert
Prechter, John Murphy, Jim Sinclair, Tom Dorsey, Steve Nison…
or, you and I.
To be used effectively, technical data must always be
combined with both the fundamentals and sentiment.
It’s like building a bomb…
By themselves the individual components are impotent and
harmless, but put them together…. and BANG!
…now you have something.
So, let’s combine what we know to be true (or think) to be
true, about sentiment and the fundamentals within the gold
sector. Let’s start with the fundamentals.
The positive fundamentals for gold and gold stocks :
-- New lows for the U.S. dollar.
-- Crude Oil breaking to new highs.
-- Global stock markets at/near all time highs.
-- The U.S. stock market at/near an all time high.
-- Agricultural commodities at new highs.
-- Commodities in general and the price of ‘stuff” at/near
all time highs.
-- The U.S. Fed cutting interest rates and injecting
liquidity.
-- The European Central Bank and the Bank of Japan on hold
with interest rate hikes.
-- The IMF issuing talking points for a lower (still) U.S.
Dollar.
-- The Yen-carry trade back on …with the pedal to the metal.
-- Global money supply/liquidity ramping.
-- And Paulson & Bernanke’s Liquidity + Intervention pump
continues, which along with the weaker dollar is increasing
U.S. exports – which in totality, determines both the value
and the direction of the U.S. markets… ie: “The LIE” formula:
Liquidity + Intervention + Exports = Value/Direction of Markets
-- The market is moving higher and gold & gold stocks have
followed higher markets – higher, all through this cycle.
As for Sentiment?
-- Well, we have gold and gold stocks back in the news, on
the front page, and in the headlines once again.
-- The marginal buyer is back in.
-- The Institutional buyer is back in.
-- The momentum buyer is back in.
-- The speculative buyer is back in.
-- The hedge fund buyer is back in.
-- The foreign buyer is back in.
And after the Yen-carry trade shakeout, the ever faithful and
eternally optimistic gold bugs are back in… long and strong.
Just take a look at the bug-boards on Gold-Eagle, Kitco, or
321-Gold. The bugs are once again dancing in the streets with
visions of $2000 gold in their heads.
Suffice to say… sentiment is once again…very bullish .
And that now that brings us to the technical side of the
equation and “The Chart part II.”
Here it is…
So what do the technical’s of this chart tell us? What
trading opportunities within our core philosophy of
finding “discrepancies between price and risk”
do we find within the chart? And most importantly, what
conclusions can we draw about the predictability of the
behavior of gold bulls…so we can position ourselves out in
front of the trade… in anticipation of it…and not behind it,
or in reaction to it?
Well hopefully that positioning and anticipation has
already occurred.
First, via “The Chart part I” … we maximized returns
by correctly identifying the rolling trading band that gold
stocks & the HUI found themselves locked within over the last
15 months.
Secondly, we positioned ourselves perfectly for the
what, the why and most importantly, for the
when… of the recent washout and forced selling and
capitulation bottom, created by the Yen-carry trade shakeout.
Which brings us to the question of – what to do now?
And for that… I have a two-part answer.
(1). I know what I’m doing…and I’ll share that in a
minute.
(2). As to what you should do… that depends on what
you’ve already done.
If you’ve had a little difficulty during this 15 month period
of whipsaw…and if you were like many traders… jumping on the
rallies, only to then get thrown off by the corrections… your
mindset is probably about “getting your money back” and
“making up your losses.”
And I can guarantee you that anyone reading this, has been
there…and done that, at one time, or another… me included.
If that’s the case, you should grind it out…trade conservatively… continually bank a portion of your profits…
and use the tools in your trading bag to minimize your
downside risk…while still allowing strong upside potential
reward.
And how do you do that ?
Well, it’s kind of like golf...
You wouldn’t have much of a chance against Tiger Woods if you
only had 3 clubs in your golf bag – now would you?
Well guess what? It’s no different in trading. You need to
have plenty tools in your trading bag. And option strategies
and techniques are some of those tools you need to have and
need to be able to use.
You don’t need to get too complex. Buying some puts for
insurance, selling some puts for premium, and buying some out
of the money calls with a portion of the profits you take off
the table are the 9-irons, sand wedges and the putters of
trading.
In golf everyone wants to stand on the tee and launch 300+
yard drives with their Big Bertha. And when they practice…
they want to spend all their time on the driving range…and
not on the putting greens.
But, if you golf… you know where the money’s really made.
“You drive for show…and you putt for dough.”
In trading… during rallies you’ll find traders doing the
equivalent of driving for show.
They focus on making money… not on keeping it.
So if you find yourself clawing back, making some money here…
but, not wanting to give it back – “again.” Then do a little
putting for dough.
Take a little money off the table on these double digit
rally days.
Then when we get a couple of days of pullback, or when an
individual stock you like pulls back… take a “portion” of the
money you’ve taken off the table into the rally, and buy some
out of the money calls…giving you some nice upside leverage –
while simultaneously, limiting and defining your downside risk.
And don’t forget your sand wedge.
The club everyone ignores…and the part of the game no one
spends any time polishing.
And what’s the sand wedge of trading?
Put selling.
In my trading bag… it’s one of my favorite tools.
It can be used to discount your cost and soften your risk on
entries into pullbacks. And it can generate lots of income via
premiums retained when the stocks never pull back into the money.
Use them.
I made double digit returns on four tranches of put sales on
GS of late. It’s a great technique for trading into and
finding a bottom.
Plan your strategies in advance on how and when you will
use various tools.
Here’s an example …
We’ve just had a nice run back up and to the former HUI highs
of the 400 level. And not unexpectedly (actually quite
predictably when you look at “The Chart part II) we met
with some profit taking and a little 5%ish pullback to HUI 380
and now today, we got a nice double digit pop taking us right
back toward the HUI 400 resistance level.
…more on this later – on why THIS 2nd run on HUI 400 is so
important.
Personally, I was fortunate enough to be trading out in front
of…and in anticipation of this pullback caused by the Yen-
carry trade shake out… so I took some chips off the table on
the move above HUI 370 and into 400. Some – not all.
And on this recent pullback (into no negative change in the
fundamentals as I see them – and no change in sentiment as I
see it (this is KEY) I sold some deep out of the money puts in
my core holdings and would continue to sell puts into the HUI
370 level…the former trading range “resistance” that
ideally will now set up as new support.
I also have stops set to take most all my chips off the table
on any penetration of that former resistance level of HUI 370.
Sub 370 I would keep my options open to actually “buy” more
puts, or to even turn short… depending on changes in the
fundamentals and sentiment levels.
I make no trade based solely on the charts.
Think of charts as road maps during a dark, midnight journey
down a winding mountain road, in driving rain.
Fundamentally, you’d want a good safe car in which to
undertake that journey. You’d want that car to have good
tires, abs brakes, maybe all wheel drive …along with the
proper sentiment, and inclement weather driving behavior
among your fellow drivers.
Change any of those components… no map, reckless drivers,
and no headlights, or bad tires … and you’ve got problems.
A road map alone won’t guarantee a safe journey.
And charts alone will not and can not – guarantee profitable
trades.
Okay… you understand how and why to take some money off the
table and how to buy a little downside insurance…and you
understand the desirability of former resistance now turning
into new support at HUI 370… but, one question remains.
A big one.
THE big one.
The one that determines whether you hold tight…or, ring the
register on the next rally.
And to answer that… let’s go back to the road map…
“The Chart part II.”
I want you to focus on the little green circles. And the
reason I want you to focus on them, is because the herd has
followed the same exact behavioral pattern on each and every
new upside move during this entire cycle.
On each leg of this cycle… we’ve established a new high, then
retraced, based within a tight trading range, then re-tested
that top, pulled back…and on the next leg – BUSTED through
that resistance and moved to new highs.
As long as we do not penetrate that key HUI 370 level [if you
are sitting on big profits from this rally – DO NOT give them
up – use 370 as a strong line in the sand stop]…I’d
be “holding tight” on the next move up through HUI 400. We
have the strongest set of fundamentals of the entire gold
cycle. Sentiment is very strong – yet not euphoric. Given
that… we can make pretty damn good risk:reward bet on both
the behavior of gold stocks and gold bugs on this next move
to what is now setting up as the next move up to new highs.
So how high is high?
Again… the road map comes into play.
And what does the chart tell us about what to expect for
this next leg up?
Well, let’s review the prior moves so far:
Leg #1 was from HUI 35 to 80…a +45 point move and a +128%
gain.
Leg #2 was from HUI 80 to 154...a +74 point move and a +92%
gain.
Leg #3 was from HUI 154 to 258…a +104 point move and a +67%
gain.
Leg #4 was from HUI 258 to 401…a +143 point move and a +55%
gain.
Each move has returned a smaller % return than the prior leg
and this recent bottom of HUI 280 came much closer to the
prior leg’s bottom than any prior leg of this cycle.
In looking at how much higher each succeeding leg moved from
the prior high, we had moves from HUI 80 to 154 for a + 92%
move for Leg #2.
We moved from HUI 154 to 258 for a +67% move for Leg #3.
And we moved from HUI 258 to 401 for a +55% move in Leg #4.
It would see reasonable to expect a move in the mid 30% to 40%
range for this next leg which would take us to the HUI 520 –
560 range.
HUI 560.
Some of you will remember back in the very dark days of late
2000, when I made what I called – “the leap from black to
yellow gold” in the HUI 30-50 range.
Whodathunkit?
I sure as hell didn’t (vbg).
It’s been a helluva ride!
In closing… you gotta give Ole’ Yeller some leash here and let
her make a run again at HUI 400. Just set those stops tight at
370 and don’t give it back.
If we break 370… we’ll re-adjust and take another look at the
fundies, sentiment and the charts.
Until then… I think we finally have valid reasons to
break out the pom-poms, to dust them off and to start up the
band…and get ready to rally gold to the next new high.
Good luck and by the way…
I apologize for not getting this out last night. Something
has been burning inside me that I’m sure many of you can
relate to…
Control.
More specifically… the lack thereof.
Control over your life.
Control over the when and where of life.
And freedom.
Come to think about it… it’s probably more about freedom,
than it is control.
Because you can’t have control, if you first don’t have freedom.
Kind of a chicken and the egg kind of thing I guess…
Life is interesting with all it’s ups and downs, the mountain
peaks and the valleys that we all encounter. Not unlike the
HUI rollercoaster ‘eh? But, the frustrating thing is that we
all think money gives us control and/or freedom.
I guess in asome ways it does. When you finally get a
lot of money, you can buy “things”…maybe even most any “thing” you want. And you do. You go on kind of a
binge. You buy a bigger house. A much, much, bigger house.
Maybe even a couple of them. Then there’s the car(s) and the
boat(s) the vacation(s)… all the baubbles and trinkets. You
soon own your “wish list” that not so long ago you thought was
only a dream.
Then something interesting happens. Even if you’ve kept your
life in proper perspective – keeping family, health and
friends above money…another realization sets in. Especially if
your wealth comes from multiplying others wealth….from working
for someone else. Someone that controls the when’s and the
where’s of your life.
The realization that time is far and above the most precious
of all commodities. Far more valuable than gold, or silver…
and money itself.
And the more money you make, the higher you rise within your
career… the less time, the less freedom and the less control
over your life you have.
And one day it finally all comes home to roost.
Yesterday was one of those days for me.
The realization that money and wealth are not the same thing.
Wealth does not come from money – rather, money comes from
wealth.
Wealth can create money at will…but, money can not create
wealth at will.
You can have what seems like all the money in the world –
and still not be wealthy.
Because wealth has a component of freedom in it.
Money…and making it, can often hold you hostage. As does
working for someone else.
While wealth…is all about freedom…about not being held
hostage by anything, or anyone.
I’m going to take some time off… a break from everything and look into pursuing a passion…
something I love doing…and would do for free… and have done
for free (vbg).
Because now I can afford to do it for passion and
not for money.
More later… just might be something very interesting
comes out of this.
For you…and for me.
For now I’m going to take a Ronald Regan vacation...
God, does America need another Reagan right now.
I’m going to dig a few fence posts. Chop some wood. Walk the
lay of the land. Watch the leaves change colors, breathe some
crisp autumn air and catch a few fish…maybe even see Notre
Dame win a damn football game.
Hopefully, this rant makes you think.
Maybe even makes you some money.
Maybe a lot of money.
Just remember, the thinking part must come before the
making money part.
I’m going to do a little thinking myself.
About things other than gold, money and markets.
I’ll see you in a few weeks…
Thanks for listening.
Hopefully you got something out of it.
Later,
SOTB`
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