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Jim Booth
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I started Trading when I was 16 and have been an active investor and trader for over 20 years.
  • Market Has Signs Of Underlying Strength

    After a very strong four week run, risk markets such as precious metals and stock indices have consolidated their price gains and are now giving some solid signals that they are ready to move significantly higher.

    Gold (NYSEARCA:GLD) - Gold has broken out of a significant downtrend that has existed within its consolidation pattern that formed following it reaching record highs in price in September 2011. Gold exhibited very good strength during its consolidation in price retreating only 21% from its all time high, despite the powerful deflationary risks emanating from bank deleveraging and a possible collapse in the banking system emanating from a breaking up of the Eurozone.

    Gold has exhibited a powerful break up from its downtrend, closing up for four consecutive weeks and closing each week in very close proximity to the weekly high showing a clear and powerful trend higher with bulls firmly in control of the market.

    The last two week's of price action have been interesting. Last weeks price action was tight in price range but was neither a decisive move higher or lower. This week, the price broke lower through last weeks low at 1752, but very encouragingly the price has snapped back, and is currently above last weeks open, close and low, again signaling strength. A break above Key resistance at Circa $1800, where the last two major rally's have failed would open the market to significantly higher prices.

    More importantly, a successful break above $1800 for gold would confirm the period from the September 2011 highs to the May lows as a period of testing for the markets primary bias to higher prices, and the support for the price in this range. Because the bias and trend have been maintained, then the period of testing reinforces investor confidence, and both will emerge stronger, and I would expect a new cyclical upswing within gold's secular bull market to emerge carrying prices another leg upwards to significantly higher prices.

    To enter the market I will be looking for a daily close above 1820, adding to positions with a weekly close above this level and adding on pullbacks with a stop at 1735.

    Silver (NYSEARCA:SLV) The price action of silver has been much wider and looser than gold, making the imposition of meaningful stop losses more difficult. And since the stop loss determines the risk reward and hence the validity of the trade, I propose to trade silver using the gold price as a proxy i.e.. by using the entry points and stop losses indicated by gold to enter the silver market. I consider it also appropriate to use these entry points to add to high quality mining stocks such as Randgold resources (NASDAQ:GOLD), Yamana Resources (YAU) and the worlds largest silver miner, Fresnillo (OTC:FRES).

    The breakdown of the uptrend in the dollar index (DXY), the breaking out of risk assets such as the Nasdaq (COMP) to new decade highs, and the breakout of the S&P 500 to multi year highs confirm that the bulls are firmly in control of the market, and supports a general hypothesis that events have caused widespread selling of stock, which has been successfully absorbed, removing selling resistance, leaving the way open for the market to proceed significantly higher.

    Currently, buying the NASDAQ at 3110, with a stop at 2743 puts approximately 2.5% of capital at risk, with traders looking for a intermediate term advance of 8-10% before taking profits giving a suitable risk reward ratio.

    As the old adage goes, follow the leading and stocks and the future direction of the market will be revealed. Under this measure, key leading stocks such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have broken out early and ahead of the general indexes and are currently consolidating close to their all time highs. Apple in particular offers a good risk reward trade as it comes back to test key support. Traders have the opportunity to buy at $672 with a target in excess of $800 dollars and a stop at $675, presenting an excellent risk reward trade.

    Google has also demonstrated excellent relative strength and has broken powerfully to new all time highs. Moreover, Google has withstood the recent market selling pressure with ease demonstrating that the share price is yet to meet any significant selling pressure despite its recent rise.

    For the purpose of full disclosure, I have a long interest in apple, Fresnillo and Randgold Resources, and I am looking to add to positions as outlined above. The above trade ideas are not suitable for all investors and investors should seek independent financial advice from suitably qualified individuals who are familiar with their financial needs.

    Disclosure: I am long GOLD, OTCPK:FNLPF, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Oct 01 6:24 AM | Link | Comment!
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