TRI Precious Metals Outlook

Gold, commodities, and commodities stocks have been the hot topic in the media and there are a lot of opinions and emotions attached to them. I wanted to show you a few charts from a technical perspective on how I think the next daily cycle could unfold, and how to manage risk during the upcoming weeks and months…

First off, let’s establish the proper mindset for trading precious metals. I am a precious metals bull, and a commodity bull, but above all I try to interpret what price is telling me. If you are going to trade the markets, you have to respect the price action, momentum, and support/resistance levels. The market does not care what your outlook or opinion is and it never will. The majority of the time you are trading price against computers, not people, and they simply react to technicals on a chart. The most important thing you must always do is pick your exit point before you place a trade, and expect the trade to be a loser. That’s right – tell yourself you are going to be wrong and list all the reasons why. It is important that you take the emotional aspect out of a trade from the very beginning, especially when it comes to precious metals. Your mind is your own worst enemy in this game.

Next, we need to have a proper perspective, let’s be objective about what has happened. Precious metals just finished an almost 2-year consolidation and then crashed through support, causing severe technical damage to the charts and turning the momentum sharply downward. There is a ton of overhead supply, and the majority of longs are either margin called out of the game or they are severely underwater and hoping to get their money back. Those are not the conditions for a huge trending bull move. However, from a contrarian perspective, there are a lot of reasons why it is going to be difficult for price to drop much lower than this level. That is the recipe for some choppy price action going forward as it is the trapped longs vs. the strong-handed shorts vs. the new longs vs. the momentum shorts.

As a positive, we are due for a daily, intermediate, yearly, and 4-year cycle low at any point. As you just experienced, these are the nastiest type, as every time frame aligns to create intense selling in order for a fresh cycle to start anew. If you refer back to Core Strategy #4 “Follow The Bouncing Ball” you will see that as a ball is finishing a bounce it is accelerating very quickly towards the ground. That is what we have just experienced. Risk management is vital during these periods because price moves very quickly, and there are both significant opportunities for profits and losses.

A Bouncing Ball in Diminishing Arcs

Now compare the image of the bouncing ball to what we see today in the miners, one of the most extreme examples of cycles in action:

April 18th HUI Bounce

We know we are close to a low “in time” but we don’t know where the low will occur “in price”. A portfolio can be destroyed quickly if you are wrong on your timing, but there are opportunities for gains if you have a game plan and manage your risk properly.

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Good trading all.

Steve Chapman, TRI


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4 comments on TRI Precious Metals Outlook

  1. Dutchisu
    April 18, 2013 at 8:03 AM (2 years ago)

    Steve

    What are your thoughts on the 2007 bottom in Oil. That was a V type bottom which did not provide an easy entry after the first daily cycle. I am assuming that kind of bottom is less likely now in gold because of how gold has behaved over the last 19 months.

    • Steve Chapman
      April 18, 2013 at 8:14 AM (2 years ago)

      It was a very clean 38.2% retracement of the move from 1998-2006 and oil was still in a massive uptrend. A lot of precious metals investors want the same thing to happen right here, the only difference is the dip in oil only took 6 months and it was before price went parabolic. Gold and silver are now almost two years past their parabolic moves, and so we are more likely to get a nice mean-reversion move here out of a 4-year cycle than a “buy the dip in an uptrend” move similar to the one in oil. That’s just my opinion, but there is some severe technical damage on multiple time frames in metals right now and there will be an upcoming battle between the bulls and bears for control of price.

  2. Dutchisu
    April 18, 2013 at 8:36 AM (2 years ago)

    That is what I was thinking. The duration was much shorter and the drop was out of an longer uptrend and I just can’t see why some are using this comparison to justify a call for a V type bottom in the PM’s. I think what we saw in 2008 is a much more likely analog. Obviously by from your update you agree.

    Thanks

  3. ALEX
    April 18, 2013 at 9:48 AM (2 years ago)

    Steve

    I love all of your reports (they are a great variety of lessons) , but this one in particular jumped out at me with the “Bouncing Balls” visual. A friend of mine is just learning of cycles and will definitely benefit from this simple visual…great charts too.

    Keep up the good work,

    ALEX