Sunday, September 16, 2012

Gold: Prepare For A Strong Move

Since I began writing for Seeking Alpha, we have had quite a nice and successful run in the metal markets. After publishing an article several months ago calling the bottom in the gold market, our latest market call was published on February 26, calling for a pullback in the metals, specifically written about silver. Specifically, I wrote that "I am expecting the silver market to top out over the next few days within the $36 region."

In fact, several days later, on February 29, the precious metals entered into what some termed a "flash crash" of its own, and proceeded to begin the correction that was warned about several days earlier. Even before the correction began, we provided guidance on Seeking Alpha that the correction will potentially target the 30-32 region in the silver futures, and to my clients we also targeted the 158 GLD region.

As you know, this past week, we dropped right into our target zone for this correction. So, the question many have been asking is what is going to happen in the market now.

What I have noticed on Seeking Alpha is that a predominant sector of the readership and the contributors are normally quite bullish with respect to the metals. However, at this point in time, there seems to be more bearish calls being seen in this traditionally bullish forum, with some even suggesting short positons, as well as some confusion, not knowing what to advise. In fact, one article even sited that Jim Rogers and Marc Faber are both bearish on gold at this point in time.

Additionally, Friday afternoon on CNBC, there were two shows back to back after market hours where they suggested a short trade on gold in the first segment and the next had a segment entitled "Gold: The Glitter is Gone."

I have always found it interesting how so many become so negative on the metals once they witness a drop in the market. In fact, the drop occurred right after many people entered the market and expected a further breakout. Many market "gurus" have been so badly whipsawed over the last year in gold that I am actually surprised that many of them are still in the market, and even more surprised that many investors continue to follow their advice.

But what has always astonished me is that, outside of the investment world, people have always prided themselves upon being able to find "the deal" with their acquisitions of cars, houses, clothes, etc., but do not seem to be able to bridge this perspective over to the financial markets. In fact, the opposite is often quite true.

This phenomena actually prompted me to write an article not too long ago, which was designed to alert investors to this psychological phenomena so they may be aware of market psychology before they make their next investment.

However, at this point in time, I believe that we are quite close to a bottom in the gold market. In fact, such a bottom would be the base from which an exceptionally strong rally should begin for gold. Since many market participants are now entering short positions, at least according to some articles written on Seeking Alpha and suggestions made on CNBC, their short covering may add more fire to this expected potentially strong rally.

In GLD, which is the chart I use to analyze the gold market (since it is so widely followed), I have had an ideal target bottoming region within the 158 region since we hit the top in the market several weeks ago. At this point in time, it is possible that we may have bottomed just above that level, but I think we can still see one more small decline that takes us towards the 158 level, and possibly slightly below it. However, this should represent a significant bottom for GLD, which will then have me targeting the 168, 174, and then the 184 GLD levels, which may be reached rather quickly.

Since this pattern has an 85% probability from my perspective, there is always a 15% chance that this pattern will not play out, and that is why I suggest a stop just below the GLD 154 level. This provides for a low risk, high probability entry, with a defined point at which you would exit the market with a small 3% loss, but with much larger potential gains, which could very well exceed 20%, and multiples of that if you use options.

Disclosure: I am long GLD.

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