A Simple Road Map for Gold

Introduction

For non subscribers and those new to my commentaries, here is a recap of what is happening with gold and gold stocks.

• My COT model confirmed a major bottom on bullion on Feb 8.
• My proprietary BPGOLD has reversed to an up cycle on Feb 22, confirming the COT model.
• We are now 100% invested in gold ETFs, funds and stocks.

Three simple charts

I've been following this gold bull market since 2001, and apart from the daily volatility which sometimes could be quite violent, the overall pattern is near text book perfect.

Chart #1 - $HUI:$GOLD

Since bottoming in late 2000, gold stocks as represented in the $HUI has been rising in a very orderly fashion:

• a six month rise from the late 2000 bottom followed by a six month correction (#1).
• major breakout (#1) set off another six month rise, followed by a nine month correction (#2).
• major breakout (#2) set off yet another six month rise, followed by correction #3 which is still in progress, for fifteen months now.

A simple observation for those who did not participate in this new bull market, is that each rise was stronger and more powerful, therefore, each correction following each rise has also taken longer to complete before the next breakout. I use the ratio chart because in order for the breakout to be legit, gold stocks have to outperform bullion.

Chart #2 - $XAU

Some of you may have seen this chart before. I first published it soon after my sell signal in Dec 2003, suggesting a multi year "cup with handle" was in progress. This chart is now being circulated in public domain as different analysts have used this chart to paint the big picture for the $XAU. But what really amazes me is the fact that the handle is progressing text book perfectly, because at the time when I suspected the cup with handle pattern, it was purely a guess. I mean, take a look at how symmetrical the pattern is! The left side of the cup took 37.5 months to complete, and the right side of the cup took exactly the same time. Now, the handle is mapping out a contracting triangle with D wave in progress, and if this pattern continues, one more dip to complete E wave and off to the races we go.

Chart #3 - $GDM

I very seldom see this gold index in public, perhaps not many people know of its existence. But what a beautiful chart it is. Similar to the $XAU above, except this chart goes back to 1996, an eight year "cup with handle". What is interesting is that the handle is mapping out exactly the same, in a contracting triangle with D wave in progress.

Summary

Technical analysis is nothing more than an educated guess, and should not be confused with a trading model. As these illustrations suggest, we are in a secular gold bull market, and if the analysis is correct, we have an explosive upside for years to come. However, as we all know, the major corrections in gold can be devastating both to your portfolio and mental health as each correction is more violent and more time consuming, and many traders/investors who do not have a consistent trading model, could suffer a great deal both financially and mentally, as the wall of worry continues to discourage the retail investors. The single most common mistake many traders/investors make is the urge to know where the market is going on a short term basis, up or down. To be honest, nobody knows that for sure, and anyone who claims he/she knows the market is a fool. The markets are dynamic and subject to constant change, just because we are clever with lines and patterns and have the markets neatly in a little box, does not mean the market will behave accordingly. This is where the trading model comes in. A good trading model provides the buy and sell signals from a few simple parameters, with well defined risk and an exit strategy. Think of it this way: technical analysis is the road map, and a trading model is the traffic lights. The fanciest GPS may look good on your dash board, but you must obey the traffic lights if you want to reach your destination. The next time you are shopping for a market timer, ask these two questions…

• what is your trading model?
• what do you base your buy and sell signals on?

Jack Chan at www.traderscorporation.com

11 March 2005