Is this Gold and Silver Breakout The Real Deal?

Tue, Dec 7, 2010 - 1:00pm

In my studies of the financial markets, I have found the study of trading tactics to be similar to my studies of military history and sports.

In 329 B.C., Alexander The Great, in his mid twenties, led his Army, through the Hindu Kush mountains to Central Asia to expand his empire that covered 1 million square miles. He was a terrific military strategist who would often defeat his opponents psychologically in order to preserve his Army which for many years marched 30 miles a day across deserts and mountain ranges carrying heavy equipment. Alexander became the most powerful leader in his generation until his mysterious death at the young age of 32.

One of his classic battle strategies consisted of ordering his men to blow the war trumpets and yell their battle cries night after night so that a besieged city would need to prepare for war repetitively. Eventually, the foes would grow tired of this daily routine and Alexander would monitor exactly when the enemies stopped reacting. As soon as Alexander, saw the widow of opportunity he attacked fast and hard and would decimate his adversaries.

Similarly in football, a defense will line up at the line of scrimmage often faking a blitz, forcing the quarterback to call an audible. Eventually after faking a few times, the quarterback lets down his guard, and that is when the blitz comes and the major yardage loss occurs unexpectedly.

Similarly with the gold ETF (GLD:NYSE), last week it broke the August to November trend and showed a negative divergence causing many technical analysts myself included, to be concerned of a steeper correction. Since my October 4th signal where I ventured out of bullion into the junior miners, the best way to play the gold market is through trading the oscillators. In August and September, gold had a steady climb higher. This was a trending market. We began seeing some key psychological bearish one day reversals in October and the gold market began behaving volatile with a false breakout in early November. At that time I focussed on my highly rated junior miners as I believed that their breakouts were more secure than the bullion due to the upside volume. After the false breakout we had high volume distribution days and broke the August to November trendline. The battle cry from the “bears” was heard. Bulls supported gold but the enthusiasm and volume was nowhere near the previous selloff. Now we have just broken highs, but on recent breakout there has been a lot of profit taking. This signals an area of key psychological resistance. A lack of volume on the breakout and high volume reversal is signaling that the bears battle cry is heard again. Will this be the real deal?

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