Outlook for Precious Metals

Gold bulls had a great run in the past few months, and those of us who participated in the latest up cycle have taken partial profits while maintaining a core position for the long term. I believe this is a smart thing to do, it is a win/win situation because if price continues up, our portfolio grows, and if we correct substantially, we can put some cash to work. The responsibility for us as market timers, is to provide the entry and exit points for both traders and investors. Obviously more challenging for traders than it is for investors, nevertheless, such a practice is not as difficult as most people think. And speaking of thinking, that is what troubles most traders, because the majority of market participants tend to act on what they think instead of what they see. Easy to say, but tough to do.

What we see - is very simple, and we trade what we see: either we buy, hold, or sell.

Investors are on a long term buy signal, issued in Nov when $HUI was at $230. Continue to hold to take advantage of this bull market.

Traders had buy signals in Nov and again in Dec, and took profits in early Feb, now waiting for the next buy signal.

What we think - brace yourselves, this is where it gets complicated for those who are not technically inclined. Folks who are only interested in growing their portfolios should stop reading now and pay attention only to "what we see". The following is for technical junkies.

You may or may not have seen this chart before, a rather obscure index, but provides great guidance for us. We began tracking this index when the handle was in the building process, and we acted upon it before the breakout using our signals in the "what we see" department. This ten year "cup with handle" has very bullish implications upon a breakout, which is now reality. But as with most major breakouts, prices tend to test the breakout point before the next leg up, therefore, I expect the 800 level to be tested before this bull runs away for good.

In the meantime, the $XAU has just reached the rim of this also ten year cup with handle pattern, obviously rejected by resistance so far, and in the process of building the handle just like what $GDM has done. Does it have to? Of course not, we think it will, unless we see otherwise.

Looking at $GDM again, but closer this time, and we see resistance at 1100 with support at 800 which is also the breakout point. Logically speaking, it is reasonable to assume that we could see a trading range between these two levels develop in the near term, as prices tend to bounce between support and resistance until a clear break either way.

$XAU at a closer look also reveals current resistance at 155 with support at 116, which will provide an excellent range for the handle to progress.

Summary

We trade what we see, not what we think. Investors are fully invested while traders have taken profits. Many of our subscribers are both investors and traders, therefore, holding a core position while trading some short term moves for instant gratification. What we think may develop in the near term is a 30% trading range so that both of these indices can have time to digest the recent gains, and to build energy for the next big move. Investors should not be affected, but traders may have some short term opportunities to scalp 10 to 20% within the trading range while the consolidation takes place in the next few weeks or months.

Jack Chan at www.traderscorporation.com

25 February 2006