Gold and Silver at Pivotal Juncture: A Strategy

By John Cassimatis  JAN 26, 2012 10:00 AM

A case can be made that both gold and silver, despite their rally, remained trapped; a break above here will very likely cement our bottom and see a potentially vigorous assent begin.

 


This is really the type of piece you get with Buzz & Banter subscription, but because of the magnitude of the moment (breakout or near-term high), I thought I’d post it for the general community. 

Several days ago I had written a piece for Buzz giving some downtrend line numbers.  I had 1688 gold and 33.30-60 silver.  As we hadn’t quite tested those marks, I thought a sharp NY rally to those levels was probable.  Yesterday I woke up with big positions, but threw a bunch to the wind in frustration; it was all taking too long.  Then, midday, the metals took over.  As in the life of a trader, it was a profitable, but entirely frustrating day.  Since everything that took place with MF Global (MFGLQ.PK) (see MF Global: Is This the Second Coming of Bernie Madoff?), I’ve been forced to keep 'em a little tighter, something I am not used to or fond of.  Somedays, in the trading business, showing up for work is about the worst thing you can do. 

Downtrend lines are funny things.  In my opinion, they are the single greatest piece of technical analysis charts have to offer.  First off, so many can be drawn.  Second, you can get a different result depending on the overall timeframe of the chart you are using.  Third, oftentimes, you can draw it this way, or that way, or even this way if we don’t count that.  Fourth, there are multiple kinds (connecting peaks being the most common). Finally, they usually never lie, but when they pull a fake-out, the fugazi, boy does it hurt.  Downtrend lines are tricky indeed.  In the aftermath of yesterday’s rally, I am studying them quite closely in both gold and silver.  Technically, if you really want to, with some prayer involved, you can make a case that both gold and silver, despite their rally, remained trapped as of 12:00 a.m. Thursday morning, by their upmost possible downtrends that the most aggressive of traders might key off of.  A break above here will very likely cement our bottom and see a potentially vigorous assent begin.  Alas, there is still that outside chance that this was it, fully satisfying the metals penchant for testing lines of importance.  The next day or two will provide the answer.  If gold stays capped at, say, 1716 and sells off into the 1685s, my caution levels will rise rapidly.  Silver too, if capped at 33.40 and a back and forth between 32.60-33.20 ensues today, then Friday will lay down the verdict.  A break above 1720 gold, 33.50 silver pretty much means we have broken out.  Don’t panic.  Grab some there if possible, but save the bulk for the likely retest of the downtrend line from the north side of town.  In this case, one would look for buys around 33ish silver and 1690 gold.  Even in a super bullish scenario, those prices are quite possible next week.  They will represent perhaps the lowest risk buys of the year, depending on just how convincingly we manage to break the aforementioned targets.

All eyes are now on this last possible bastion of resistance by the bulls.  I myself would love to see the bears hold it here as I am not mentally ready to go full force, but this is not in my control.  This is truly the moment.  As I stated yesterday, gold’s general sluggishness pre-ramp was coupled by some bullish factors including a general price break, improved COT report (less speculation), and far more enticing RSIs.  As good investigators do, they follow the evidence, not necessarily what they want to believe (like poor cops).  In my opinion, a break into the 1720s gold and high 33s silver will point significant evidence toward big gains to come.  Many of us have known that gold’s bubble has not burst, and that the great parabola is still to come.  We just didn’t know when it would start and how low the metals would go beforehand.  Clarity could come our way. This “evidence” (1720+G, 33.50+S) would likely rule out some of the more punishing scenarios that have existed to date.

I have unequivocally stated that the metals' parabola is still to come.  This is easy.  I don’t write for Minyanville to tell you the easy.  I try to explain the hard, the details, and the devil in those details, too.  My followers know I am human.  I obviously have my times when I misread (euphemism) things.  I know I am right more than not, though.  And I’m good at picking prices, once I have full confidence in the true direction of the move.  At these prices, if you like to get aggressive with the metals without confirmation, you must be careful.  No one wants to be right long-term, but get squeezed out before the move--this is the great challenge.  Until downtrends are convincingly broken to the upside, this particular risk looms large.  That’s why the market typically rejoices so when such legitimate fears are stripped.   My method has always been to buy weakness to obtain a base.  Then, I like to add on accomplishments (like breaks of downtrend lines).  Silver’s recent breach of 30.90 broke a lesser resistance point and the gap to 33.30 was filled rather rapidly.  I took advantage of it and now am all eyes as we wrestle with the larger, more significant of the two.

It’s never fun to buy a rally.  Personally, I hate it.  My greatest challenge as a trader has been paying up.  You can really get burned.  A break of this final downtrend likely insures higher pricing to follow, perhaps significantly so.  For the next two days, my motto is this: overcome “final downtrend resistance," and I am going to work myself in pretty aggressively (not all at one price or day). Downside risk should be reasonably low, and read the following note to see my bids.  The weaker amongst us will lament 1655 sales before the explosion (I made one).  The strong will move on, pay up, and hope that the market gets them in the money quick.

Last note:  If 1720 or 33.50 silver are not breached to the upside in a day or two, serious trouble could be on the horizon.  I have given you my game plan.  For today, I am working 17029 gold bids down to 1693.  For the silver, I’m in the 32.80s-90s.  Even if the metals ultimately fail, there should be ample opportunity to get out if final resistance is not breached.  It’s a good way to get started if they do the opposite, to pick a bit, despite that chance of a top.  I will update this post as necessary.  If gold is above 1720 as this goes to publish this morning, I may post a follow-up. At that point though, I'll likely be talking only about where to try to add exposure.

No positions in stocks mentioned.

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