When Jim Cramer stated that he has been recommending 10-20% of your portfolio should be in gold he also mentioned that the stock GG should not be down on a day like today(June 1). We say of course it should be down. In our mission to help investors and traders sort through all of the meaningless data and opinions that they listen to everyday and enter and exit into positions profitably, we felt this was a good opportunity to discuss where 90% of portfolio managers and individuals in the market get it wrong.
GG is down on a day like today for a couple of very simple reasons and they are all based on understanding the tools one should use to trade with over the short term, technicals. Let's take a look at the chart of GG above.
One can see GG had a big run followed by a heavy volume selloff through critcal support at the 50 day moving average level. This was followed by a lower volume bounce off the next obvious area of potential support at the 100 day moving average level. This bounce lasted 2 weeks and ended this run up 5 days in a row.
Experienced traders know that stocks don't typically go up more than 5 days in a row without taking a breather and even if they do the longer they run, the more likely they are to get caught up at technical resistance levels. We also saw one of our short term trademark reversal patterns on May 31 where a stock hits and obvious resistance area, reverses off the new highs only to close at or below the open for the day creating a large reversal body on the chart. This is normally a red flag and we can point to countless examples where this has happened. Once an area such as the 50 day moving average is breached and a bounce occurs it is very common for that old support to turn into a point of reference for further profit taking and selling pressure as well as a place where shorts add to their positions. Odds favor this happening a majority of the time and this is what is going on here today.
Remember, trading using fundamentals or opinions over the short term can lead to severe damage to your portfolios. If you must use fundamentals or a story as a backdrop for your investing this is fine but please use the technicals (technical analysis) to tell you WHEN you should be buying and WHEN you should be selling. This will supercharge your portfolios performance and let you understand why stocks behave the way they do on days like today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.