Precious Metals
Wednesday,
November 26th, 2008
A few days ago I posted on SectorExchange.com a play on Gold. This was contrary to the views I have expressed about gold on an intermediate term perspective. So, why the change of heart? From a short term perspective gold has gained momentum worth looking at and as an investor I should not project my feeling onto what is happening. Technically the metal gained momentum off what is perceived to be a weakening dollar on the horizon. With all the stimulus bailouts and money put up by the Federal Reserve alone there are indications the dollar will weaken under the debt load. Thus, a short term view that gold will rise and the dollar will weaken. Since posting this gold has moved from $750 range to $820 and the dollar index has moved lower. Am I a prophet? No, just someone who scans the market everyday and builds a watch list based on what I see. Many of the things on my watch list never pan out, but when things do pan out, like the theory on gold, I am ready to put it into play based on a predefined strategy. That to me is the key to investing your money based on disciplined.
The chart below shows what I was looking for to enter a play on gold. There was a sloppy potential of a double bottom building along with the premise a weaker dollar would drive prices higher short term. The break above the short term downtrend line on above average volume was the entry point. The two previous days attempts to move above this downtrend line was the setup. This was all accomplished by scanning the market and looking at where the opportunities were. This was tracked from the viewpoint of double bottom being completed. The technical data sparked my interest and then a look at the fundamental research surrounding the decline in gold prices led me to what was developing around the dollar. Combining the data gave me the strategy and approach to enter the play. The initial stop was close to the entry due to the overall volatile market as this was a short term play.
What is the outlook now? I have raised the stop and take the move above the 50 day moving average as bullish short term bullish. Thus, a break below that would be an exit signal for me short term. I expect a move towards the 200 day moving average and you can see on the chart the target for the play. Much of the strength short term will depend first on dollar remaining weaker and second does the thought of owning gold gain emotional momentum from investors who feel they missed the play and start to jump in now. Momentum has moved higher and shows the metal as overbought short term. So, I will continue in the play and watch how this unfolds.
The precious metals sector is worth looking at as well. The Dow Jones Precious Metals Index chart is below and shows a similar double bottom and the attempt to breakout the last two days. The 50 day moving average is giving some resistance currently and a break above this level on increased volume could present a potential play in the sector as well. Be patient and have a defined strategy for any play.
HAPPY THANKSGIVING!
Jim
Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.
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