"AND THE BEAT GOES ON !"
Peter Degraaf
"The most successful traders/investors are those who know when to get onboard - and then ride the waves."…Richard Russell.
Since none of us know the future (except God), we should not expect to know what tomorrow will bring. That said, we must nevertheless plan ahead, and anticipate the future as best we can.
In trading and investing, it behooves us to do more of what works, and less of what does not work. Trying to pick every bottom and get out at every temporary top simply does not work. You can get lucky every now and then, but consistently entering and exiting a market at every turn is next to impossible, and it is very hard on the nerves! Part of the problem is that the 9000 hedge funds drive short term ups and downs with their computer-generated trading programs. These programs often trigger each other, causing increased volatility.
A much better idea is to find a sector with bullish supply demand factors, i.e. increasing demand coupled with decreasing supply, and then apply T.A. (Technical Analysis) to that sector, or to components within that sector.
Despite the fact that the CRB index has been dropping for most of the past 8 months, a number of commodities are resisting this downtrend: Uranium, nickel, zinc, molybdenum, gold and silver are all in solid uptrend.
Question: "How can I tell if a commodity is trending up, down or sideways?" The answer is simple: Just look at a chart, and check the progress of the 200 DMA (Daily Moving Average), red line on the chart.
Featured is the daily bar chart for gold, going back 2 years. The trend, as determined by the 200DMA is decidedly 'up'. In my 50 or so years of trading the metals, I have learned to obey the 11th commandment:
"Thou shalt steal every good idea thou comest across".
This next idea comes from veterans such as Richard Russell, Joseph Granville and Adam Hamilton (among others): "When the 200DMA is rising, every dip near the 200DMA is an opportunity to buy - when the 200DMA is falling, every peak near the 200D is an opportunity to sell".
In the above chart, not only is the 200DMA rising, but we have a repeated chart pattern (circled). In this pattern we have the 50D (blue line), dipping briefly below the 200D (red line). When we saw this pattern around August-September 2005, it preceded a rise in the POG from $430 to $730. The arrows on the chart indicate the spot where the 50D moved back above the 200D, (always a bullish sign in the world of T.A.).
(Editor's Note: When the 50dma rises above the 200dma, it is known as the Golden Cross…a decidedly bullish sign signaling materially prices going forward).
Since we cannot predict the future, we also cannot be absolutely guaranteed that we will see a $300 rise starting tomorrow, but in view of the fact that we are dealing with a rising 200D, and a repeated chart pattern in a sector where the fundamentals are bullish, that is the way I'm betting!
Featured is the daily bar chart for silver. After moving too far above the 200D in April-May 2006 (and offering traders an opportunity to take profits), the correction ended in June 2006, right on schedule, at the 200D.
This chart is even more bullish than the gold chart, in view of the fact that the 50D (blue line), never dipped below the 200D (red line), and is still in positive alignment to the 200D. The green vertical dashed lines indicate three previous buying opportunities during the past twelve months. Are we witnessing a fourth at present? Since no one knows the future, we cannot be sure, but when we are dealing with a commodity where demand is exceeding supply, along with a rising 200D, that is the way I'm betting!
"History seldom repeats, but it often rhymes"…Mark Twain.
In the recent past a lot of analysts have used the HUI and the XAU index of gold and silver stocks on which to base their expectations of future direction for the metals markets. It is my contention that these indexes are not as reliable as they were in the past, thanks to the introduction of the ETF's (Electronically traded funds). A lot of money that used to go into the senior gold producers is now going into the ETF's. The new 'Blue Chips' if you will. In a future article I will present a side-by-side comparison of some senior miners with the ETF's for you to judge this theory for yourself.
"When an analyst uses T.A at the exclusion of fundamentals, he is as a man driving a car while looking solely in his rear view mirror"….. R. Clare Hall
January 21, 2007
DISCLAIMER:
Please do your own diligence, I am not responsible for your trading decisions.
Peter Degraaf is an online stock trader. He issues a weekly Email update to his many clients. For a 60-day free trial, contact him at ITISWEL@COGECO.CA
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