gold miner breakouts - at last

davefairtex
By davefairtex on Tue, Jul 16, 2013 - 11:10am

This AM I'm seeing a whole lot of gold & silver mining stocks breaking above a 3-day congestion zone clearly outperforming their respective underlying metal.

Here are a few examples: SLW, GG, PAAS, AUY - with a bunch more close to doing so as well, including the index GDX and SIL.

One "buy opportunity" is just such a move above congestion, with a stop below the congestion area in case the breakout fails.  This is one version of "buying the breakout."

Silver still seems to be stuck at $20, and gold somewhat below $1300.  If the dollar keeps dropping, likely those levels will be breeched.  The move in the gold mining stocks may be a "tell" here.

 

4 Comments

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 864
Breakout or More Congestion?

Dave,

The miners broke out after Bernanke's short press conference and then settled into the "congestion area." Bernanke has a couple of days of testimony in congress this week. Will he support the FOMC tapering or his press conference "won't happen soon" remarks? Looks like the $ index is off half a percent right now. Oil is solidly above $100/barrel. Ten year bonds are relatively stable. Stocks hit new record highs (again) yesterday.

In an ideal world, Bernanke would like to see oil, interest rates, and gold go down. He wants bonds, stocks, and housing to go up. In our real world, these goals are at odds with each other. Since he will be leaving the chairmanship at the end of this year, his time frame of manipulation may be limited. Deep down, he'd like to exit with his reputation intact. Let the next chairman deal with the fallout.

I'm wondering if this price action is just a "buy the rumor" event. Once it starts, it feeds on itself until it doesn't. In your experience, does this feel like a breakout or just big boyz making money on a trend?

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5464
we try not to care

When looking at a breakout, we try not to care about all the macro factors, big boys, etc.  We assume all that information is folded into the price & volume data.  There does look to have been a lot of accumulation in the past month or so - really heavy volume days where the price didn't move all that much.  Likely big boys were collecting stock from ma & pa after downgrading the miners right at the bottom.

And if we're wrong about the trade - and we have been wrong before, more than once - we get stopped out with a 3-4% loss and we wait for the next signal.

If we're right, perhaps miners move a good 30-40% off the bottom.  If we're wrong, we take a 3-4% loss.  Let's say its a 60/40 play, with 60% against.  Seems like a reasonable play, doesn't it?

There are a lot of other stuff that "informs the trade" such as dreadfully bearish sentiment (and presumably a lot of shorts to go along with that sentiment) as well as a very extended to the downside GDX:GLD ratio that is just now starting to turn up.  It all melds together and says "sure, let's take a shot on this one".  In fact, if GDX:GLD ratio just moves up, even if gold itself stays the same, miners will likely creep up slowly.  If they can move above their 50 MA, that will scare some more shorts out of the market, pushing things up even more.

Things never move in a straight line.  Two steps up, one step back, that sort of thing.

And if you are nervous about the longevity of the move, after the next breakout, you can move your stop up right underneath that next consolidation area, so if things turn south, you keep most of your gains, but you don't cap your winnings by selling.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5464
trading: a different way of thinking

Buying a breakout, or trading any one of a bunch of patterns, is nothing like following your favorite guru.

In guru-land, the Guru is right, Guru knows all, you execute your decision confident in the knowledge that Your Guru will not fail you - he's really smart, he's an expert, he's been doing this for years, you've paid him a lotta money, he's got a credential, the stories he tells you make sense, he works for a Big Bank, etc.  We all want to have a Guru, there is something in the human condition that wants to be able to just have faith and make the decision once and have done with it.  I Want To Believe.

A trade, on the other hand, is entered into with the explicit understanding that it might not work out.  You try to only take trades where the odds are hopefully in your favor (like playing blackjack at the casino, and betting big only when the count is in your favor), but at all times you realize you can easily lose a hand.  The idea is, you set the situation up so that losing hands should cost pennies, while winning hands should return dimes, quarters, and dollars.  Perhaps you lose 50% of all hands you play.  But that's no big deal, because every winning hand makes up for 5 losing ones.

This is an approach we're not used to in life.  Religion teaches us to "keep the faith" and "remain steadfast in the face of trials" - this is how the hero in the movie acts, and if he does this, he always seems to perservere.   Trading discipline on the other hand encourages us to bail out immediately if things aren't working out, so small losses don't turn into big ones.  In that sense, trading is like guerilla warfare.  If he ambushes the wrong convoy, the guerilla doesn't sit there and slug it out until death with the government troops.  At least, the successful ones don't do that, because that would just be dumb.  There are usually 20 government soldiers for each guerilla, so fighting to the death is exactly what the government wants to encourage.  So instead, the guerilla only fights when its to his advantage, and if things aren't working out for some reason, he cuts and runs so he can fight again another day when the odds are more in his favor.

Since we're small fish by definition, we have to approach trading like guerilla warfare.  We cut and run if prices don't go in the direction we want, and wait for another entry pattern that looks good.  Patience, patience.   Sometimes, there is no trade to be made, no low risk entry.  Sometimes the convoys are all too well-protected. We don't want to run a high risk of failure, so we must wait.

This is why for a trader, price = truth.  Its not about metaphysics, its about keeping discipline, and not slugging it out with the government soldiers to the death (of your portfolio).

And its a very hard thing to do properly.

Of course, trading isn't the same thing as having a stock of precious metals around as insurance against some monetary disaster, and so we should keep in mind what your goal is when you start.  However, its unwise to start thinking you are trading and end up becoming an "investor" because your trade went against you.  I only mention this because...I've done it!  And let me tell you, it's not fun!

Just some food for thought.

silverinvestor's picture
silverinvestor
Status: Member (Offline)
Joined: Jul 21 2013
Posts: 6
Regarding faith in technical

Regarding faith in technical analysis:

This is why for a trader, price = truth.

There are many studies like this one that trading on technical analysis does not give any better results than chance.  In the below study, 5000 such techniques demonstrated this fact:

http://www.businessweek.com/investing/insights/blog/archives/2008/08/technical_analysis_useless.html

The edict "price = truth" by people like William O'Neill was before the markets were based on a some kind of fundamental accurate price discovery mechanism.  That just doesn't exist as a precondition anymore.The price discovery mechanism is clearly broken for a number of different reasons (FED intervention, HFT, algorithmic trading, JP Morgan monopoly, etc).  Adding technical analysis on top of flawed price data is setting oneself up for failure in my opinion and just compounding the effect.

Look at the people who know the market well (Mike Mahoney, James Turk, Eric Sprott, David Morgan, etc) and what they have been saying for 3 years that gold and silver will go up anytime now.  They have been wrong in the timing in my opinion because the market is manipulated and therefore no one can know the timing in a manipulated market.  

Technical analysis did not predict the recent massacre in the price from $32 to $18 and neither did the fundamentals for that matter either. 

"Reasonable plays" have no meaning when companies who pay can see your stops and move the price to take out your stops.  

I personally think it is a waste of time to play the market based on price and technical analysis.

Just my two cents.   I'm an investor and not a trader anymore in the precious metals.

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