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Market Masters: Livermore, Wyckoff and Loeb
  • Randgold: The Next Trade 0 comments
    Feb 13, 2014 2:11 PM | about stocks: GOLD

    Now that the wedge breakout is underway, the work that lies ahead for Randgold Resources Limited (NASDAQ:GOLD) is to determine if there will be another short-term indication.

    The other majors such as ABX, AEM, AUY, GG, and NEM have all moved well off of their lows. The difference between those and GOLD is that if GOLD approaches the 105 - 110 level (or higher) as identified in the last update, there will be very little overhead supply.

    The overhead supply problem is significant as those still hanging on to losing positions will sell out as they "get out even" no matter the bullish indications of the stock.

    This is the crux of the whole Battlefied Victor report. If there is a breakout, GOLD may be rising dramatically while the rest cope with one area of overhead supply after another.

    Randgold is not exempt and has at least two areas of overhead supply. One being the 80 - level and the other at the 100 - level.

    The 80 - level is the most established and has been an axis line for about four years. This is the area where a trading range is most likely to develop before (and if) GOLD moves to a higher level.

    (click to enlarge)GOLD Weekly

    Charts by TeleChart

    If the trading range develops (no guarantee), it may also be the last time that a low risk position at these levels may be established. The 100 area is not well-defined and therefore offers less resistance than the 80 - level.

    What is meant by "low risk".

    Hypothetical example:

    • Our initial entry was at 60.94 with a stop at 60.82, which was the low for the day. That means the risk was 12-cents/share. A trade that "risked" $100 would equate to a position of 833 shares.
    • The second entry was at 61.22 and used the original stop of 60.82 as the risk: 40-cents/share. Again $100 risk equals 250 shares.
    • At a total risk of $200 we now have a position equal to 1,083 shares that is showing (at current levels) an open profit of: $18,178.
    • That equals over 90-times risk!

    The caveat is that only after having tens-of-thousands of hours at the screen can one intuitively know that price action is not going to threaten the stop level (or gap-lower overnight). So, taking on a huge (in our view) 1,000 share position in GOLD is not recommended for anyone that does not have over 10,000 dedicated hours and thousands of trades.

    This topic is covered in Malcolm Gladwell's book "Outliers" where he discusses proficiency in any skill or industry. In that book, he identifies 10,000 hours as the level required to achieve mastery.

    As a side note, after spending over 24 years in engineering and a significant part of that in avionics and aircraft flight-test, a pilot was known to have achieved mastery if he had 10,000 hours or more of flight-time.

    The thinking was that anyone who was able to acquire 10,000 hours of aircraft flight-test time and not be killed in the process had achieved mastery.

    The last company that I worked for in a small Texas town was founded in part by a Viet Nam chopper pilot with over 10,000 hours.

    He used to amuse himself by taking the Bell 210 helicopter out, a civilian Huey and fly-fast at tree-top level, scaring the cattle (the VC) below.

    Taking on 1,000 shares of GOLD would be no different. You are flying fast at tree-top level so 10,000 hours is a minimum requirement. Just the same, we will leave the 1,000 shares for the chopper pilot. :-)

    If GOLD does break out to new highs.... and we are quite a ways away from that at this point. However, if it does break out then a measured move target is in the area of 200 - 250 just for starters.

    This is the type of advance planning that is required to get the absolute maximum return from any sector: Identify conditions (gold bull market), identify the leader (GOLD), identify the pivot point (January 10th) and successively take positions until the trade has ended.

    One thing that was common between all three of the early masters: Livermore, Wyckoff and Loeb, was that they understood that the big money was in the big move. They all positioned themselves accordingly.

    Disclosure: I am long GOLD.

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