Gold Technicals: Can you "HANDLE" this?

Stewart Thomson
email: s2p3t4@sympatico.ca
Aug 10, 2010

1. Stockcharts.com.au says that if 100 people begin trading the market, after a year only 20 are in the black, and after five years, only 5% are in the black. I view that as likely an optimistic number. Secular bull markets totally distort the reality of the markets, most of which were designed by the banksters as wealth transfer mechanisms, from you to them. I think the numbers are more like 1 out a 1000.

2. The gold community may have been beat on hard by the banksters since 2006 in the junior stocks arena, and a lot of stock was liquidated over the past 4 years, but the gold community is still here, and in many ways is stronger than ever.

3. Here’s one reason why: I want you to focus on the relative performance of the various sectors of the market. Since the October 2008 and March 2009 lows for the major stock and commodity markets, my stats show the Dow rising aprox 70%, the Chinese stk market (FXI-nyse) rising aprox 150%, and gold bullion rising aprox 85%.

4. Various real estate ETF’s have risen about 150% off the lows. All in all, the various markets have done extremely well, regardless of the “minor detail” that aprox 99% of the world’s investors were liquidating into the lows, instead of buying them. Even the blown-up financials rose a stunning 180%.

5. What about the gold community? How did YOU do? We all know the (maniacal) focus of the gold community is on junior commodity stocks. First of all, the average intermediate and seniors gold stock has appreciated by aprox 260% since the lows, blowing away the performance of all the other sectors!

6. Second, the average juniors stock is “only” up a staggering 1000%. One thousand percent. Is anybody listening? Many are up 1500% and 2000%.

7. There are two major risks to be managed with gold juniors; price volatility risk, and “your stock goes off the board risk”. Listen to me very carefully, and those of you (many) with high level mathematics (probability analysis) backgrounds should understand all too well what I’m talking about: If the odds of a stock trader making money are somewhere between 1 in a thousand and 1 in 20, and the odds of a junior stock experiencing regular bouts of extreme 50-90% price volatility on an ongoing basis, and the odds of any junior going off the board are in excess of 80%, what are the overall odds of the juniors stock investor (you) making money?

8. It could be legitimately argued that the odds are less than one in a million. I would argue that the OTC derivatives crisis throws a giant gold monkey wrench into any such probability analysis, as the upside target for gold is totally unknowable and could be wildly higher than any of us believe if the US dollar goes into crisis mode.

9. A number of my subscribers yesterday noted that a number of analysts had noted the “failure” of the cup and handle pattern on gold bullion, including technical supremo Bob Hoye.

10. First off, if you look at the analysis Bob posted on 321gold yesterday, his focus is on certain moving averages as points where gold might be bottoming, not topping, and we’re very close to those points now.

11. Second, I agree on the cup & handle, but that discussion concerns what I consider a small cup & handle. You have heard me discuss the term “head and shouldering”, which I coined. This technical phenomenon occurs when a head and shoulders pattern forms, then it becomes the head of a larger head and shoulders pattern. It may repeat numerous times, creating a sort of h&s “octopus”. Even the shoulders may be h&s patterns themselves.

12. That situation occurred with the monster h&s bull continuation that occurred between gold $680 and $1033, and is still the dominant technical driver in play in the gold market today, projecting a minimum move of $1300, and likely a lot higher.

13. Here’s a look at that pattern which has, arguably, become itself a monster cup in a “supermonster” cup and handle pattern. The cup & handle built in the 1225-1045-1266 move is now an apparent handle in that pattern.
Gold. The SuperMonster Cup & Handle In Play Now

14. The bottom line is that the technical situation is becoming ever-more bullish by the day, and the sheer size of the “supmonster” cup&handle indicates a move to $1700 or even $2000, is easily possible, technically speaking.

15. Could the handle be lower on the chart to give it a better look? Yes, but size is what matters, and it could be legitimately argued that what you are looking at here, is similar to what occurs when the right shoulder of a head & shoulders is much higher than the left shoulder, as occurred in the wheat market recently, fuelling its epic parabolic move of 88% in less than 2 months! The handle may in fact be reflecting a coming move in gold upwards of tremendous power, and would explain Jim Sinclair’s bold statement that the current decline in the gold price under the cover of “watch out it’s 2008 again!”, is seeing the banksters on the gold buy in a massive way, anticipating a horrific move down in the US dollar and a momentum move in gold that duplicates the mind boggling price velocity of 1979!

16. I was a solid buyer into 1160. All seems AOK right now, despite the fact we are headed into stock market crash season and gold and US dollar have been operating in sync. Here’s a look at the US dollar chart, an 18 year chart.
US Dollar. The Line In The Sand At HSR 80. Odds are 67%, basis Edwards and Magee, that the symmetrical triangle is resolved in the direction price was going when it went into the triangle, which in this case was down. When you factor in the supermonster cup and handle, and the head and shoulders built between 680-1033, odds seem high that 80 eventually falls. Unfortunately, most investors take far too large trading positions, often 50 times larger, than a professional would take, to “play the action”. The bottom line is that many “shoot from the hip” analysts in the gold community have far outperformed the professionals in terms of calling the ongoing US dollar bear market, but have shot themselves in the head by taking madman-size trading positions to capitalize on their view.

17. The fact is that 80 is monster HSR (horizontal support and resistance), and it is a significant round number. The US dollar is a buy at 80, not a sell. The daily chart is oversold, but it doesn’t indicate whether price will rise much or not. I would suggest IF the gold-US dollar in-sync link gets broken here and now, gold could decline modestly while the dollar rises, and in fact as I write this my usd/cad register is going into machine gun mode. Here’s a picture of the chart, USD versus CAD.

18. Yesterday I talked about the symmetrical triangle technical sell signal that my Pgen bought, while the chartist sold. The results today speak for themselves.

19. I’m a little concerned, but only a little, that the gold community has lost sight of the fact that we’re in crash season for the stock market now, and gold itself has staged a spectacular $55 rally. Further, gold has been on an 8 day tear upside, so you can’t realistically be demanding that kind of profit velocity continue without rest.

20. There is up-wedging action taking place on the daily charts of the Euro and the Australian dollar, as well as budding crosses of the stalwart MACD 12, 26, 9 series. The Dow is also showing some up-wedging, and I’ll cover those on the website this morning.

21. The bottom line is that the gold community handled the fall from gold 1266 to 1200 badly, as a whole, as did the fund community. Serious liquidation occurred, panic liquidation. A rally followed to 1220, and a small h&s formed that morphed into a bear consolidation. We then sunk to 1160, where subscriber GoldLion called for a $50 rally, which we got.

22. Some of the technical indicators like MACD have given “buy signals” on the daily chart, but often a bottom requires some false starts. Buying after gold has rallied $55 just doesn’t make sense. You should have bought a decent amount of gold items into 1160, traded some out on the $50 rally, and now we simply are waiting for gold to answer the “over 1220 or under 1160” question. There is ZERO question as to what our actions will be when that question is answered by price, not analysis.

23. My words to you today are, “don’t get cocky”. You handled 1200 badly, and handled 1160 extremely well, as a group. We can’t know whether we’ll be required, all of us, to handle 1150, 1140, 1130, 1120, etc. You need to do what it takes to mentally put yourself into the game, so whether we go to 1220 or 1160 you are a player. For some, it’s going to mean abandoning the quote screen. That’s almost sacrilege to some. It’s shouldn’t be. Monitor your emotional state first, and monitor the market only once you’ve got a handle on that first item, that all-critical item.

24. What most investors don’t get about investing is that every day is a new day, and no matter what price range you are in, you are going to have to bring the same level of discipline and effort to the table. It’s like going to the gym. You might have certain knowledge about what exercises to do, and maybe you’ve done them for 20 years, but you still have to do them. The here and now is about facing prices below 1160. I got a lot of “assumption” emails lately on gold. “We’re in the clear now” seems to be the underlying mental theme in the gold community right now. I don’t see it that way, and as I prepare to send this off I’m getting a message that my gold short pgens, which cannot exceed 30% of my longs, are ringing the cash register below dec 1195. Keep the edge. There is no “we’re in the clear now” mentality to be had in the markets. That’s giving yourself a financial death sentence. I’ll leave you with one positive statistic, which is that “only” about 90% of the time when gold is “hit” going into any FOMC statement (we have one today), it rises upside after the statement! Are you prepared? Stay focused on the big cup and handle picture!

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August 10, 2010
Stewart Thomson
Graceland Updates