Be Careful Chasing Gold and Silver, Overbought Condition Could Lead to Correction
Mon, Sep 27, 2:41 PM ET, by Jeb Handwerger
At the end of July I published a series of articles calling an important buypoint in precious metals. To see my archived article from that point click here http://goldstocktrades.com/blog/2010/07/21/trading-method-signals-buy-gold/.
In these articles I mentioned a target of $21 by the end of the year. Right now silver has reached that target after making an explosive move higher. Silver has made a 15% gain in 5 weeks. I have found having targets and taking profits at overbought conditions is crucial in a trading strategy. As a trader it is of primary importance to understand long term trends and in a bull market to add to positions when they are on sale and take profits when it is receiving a premium. Using oscillators to determine warning signals to buy and sell are extremely helpful but needs to be used carefully. Breakouts could lead a momentum indicator to stay at an extreme ratio for an extended period of time which is the case for silver and gold at the moment.
Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies. Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them. Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.
The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.
Silver's move has been parabolic and is very overbought. A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support. It has had 5 up weeks with a 15% gain from my buy signal at $18.30. It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely. To enter at this point would not be prudent according to my strategies.
Instead there are some miners who are coming out with great news that are oversold at the moment. I believe these miners will outperform even if bullion corrects. Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold, Kinross buying Redback, Continental Minerals being bought out by Jinchuan Group . A weak dollar combined with emerging market growth will cause more interest from overseas to buy natural resources. Base metals have been performing very strong. There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days. Most of the gold and silver miners I follow have resources with low cash costs and close to infrastructure. A lower gold and silver price will not impact these miners as much as other miners with higher cost projects.
To find out about which specific stocks I am researching go to my website at http://goldstocktrades.com.
Disclosure: I own gold and silver bullion and mining stocks.
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