Connecting the Dots

Joshua Fritsch
July 14, 2005

Deciding when to buy and when to sell (in any market) is a difficult process. Since there are no guarantees, the best one can do is to gather bits and pieces of information that lead to a logical conclusion. In other words, try to connect the dots!

DOT I

We can see from this chart that our long consolidation dating back to December of 2004 has centered around the previous high achieved earlier in the year. The RSI and MACD are showing a moderate oversold condition - - while we may fall further, a turn to the upside is expected sooner rather than later.

DOT II

Switching to a weekly perspective cuts out some of the noise we see in the daily chart technical indicators. Here the intermediate tops and bottoms are more clearly defined. Also take note that each correction has bottomed at or near the previous top. We can also see that 3 of the 4 major highs shown here occurred in the November-January time period. This means we want to be positioned for a move before we hit that critical period. However, most people I know do not trade futures - - so while now may be a good time to load up on physical bullion, most gold bugs can't "make money" on swings in the price of gold... they depend on the gold stocks. This leads us to our third dot, which centers around the HUI.

DOT III

Here we compare moves in PM stocks to moves in the price of gold itself. The red vertical lines indicate a new high in the price of gold. This phenomenon clearly has been shrugged off by the gold stocks every time it occurs. However, the blue vertical lines indicate the reactionary confirmation low made by the POG. Apparently, the stocks don't move until gold "proves" it's not going to fall back under a previous "maginot line" of resistance. Had we bought on this signal the last two times it occurred, and sold when gold made a new high, we would have been in a perfect position for all the major twists of this bull market in gold. Keep in mind that markets of any type throughout history are famous for not doing what you think they should do - - as I'm sure you've heard before, "The market can remain irrational longer than you can remain solvent."

Those are the dots. I've connected them in the manner I believe they fit together best. Buying or selling... that part is up to you.

Joshua Fritsch
email: jmf@jmf.name
Fritsch archive

Disclaimer: The information contained in this article is believed to be factual, however, the author cannot be held responsible for mistakes or intentional deceptions on the part of the sources. Price targets are a matter of opinion - trading in the market entails risk, and that risk is assumed solely by the trader.

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