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Beam Me Up Scotty. To Gold $1700

Stewart Thomson
Dec 30, 2008

  1. The CFTC's COT gold report is out. The funds continue their price chasing frenzy to get on board "the big one". Last week's report showed the funds bailed on 4,000 failed shorts and added 25,000 longs. Yesterday's report showed they added 8,000 longs and bailed on another 3,000 shorts. Meantime the bankers continue to build their shorts in gold following a $200 upmove in the gold price. Last week's report showed the bankers piling on 30,000 shorts. This week the bankers added another 10,000.
  2. Earth to the fund industry: "Knock knock on your collective coconut head.anyone home? If you chased price 1000 times and got burned 90% of the time, isn't the lesson: Don't Chase Price? 40,000 shorts piled on in 2 weeks by the bankers and you are loading up on gold in yet another price chasing frenzy?" Maybe it is a great time to buy vast amounts of gold, after a $200 upmove. And buy it from the guys who bought it at $680-800, who bought it deep in the pain zone.
  3. Here's the amount of money I'm willing to spend to buy gold here: one cent.
  4. As you will see later in this article, the medium term picture for gold may be about to turn shockingly bullish with the upside target quantifiable. Having said that, the COT report clearly shows that if you are piling on gold longs here, you are betting directly against Mr. and Mrs. Bank Owner. Who are piling on bets it will tank. How quickly the memories of gold at 680 and gold stocks down 70-90% fade away. Bitter memories replaced by price chased (pipe)dreams of gold $1500, gold $2000 and higher.
  5. Stayed focused. Get lean and mean. Prepare yourself for battle. Are you prepared to buy gold into the next $100 sell-off, whenever it comes? I hope so. Because it is a reality that will happen. How about the next $200 sell-off? Are you prepared? Subscribers know my prediction for gold is $6500. And know predicting gold's final price target is a completely separate exercise from making money in gold. Yesterday was another good day on the gold hockey rink for us. Lots of pucks going into the net. Sell into strength. Buy into weakness.
  6. It isn't that hard to make money in gold. Here's the secret: If you get up in the morning and gold is up, you are a seller. That is your job for the day as long as gold is up. To be a gold seller. To take some money off the risk table, off your risk table. If you get up and gold is down, your sole gold job is to be a buyer of gold.
  7. Charts, earnings, mine reports, tips. All these are tactics and tools to help you do your job. Buy weakness. Sell strength. If you try to do some "other job" in the gold market there is only one outcome: failure. The average return of minus 50-75% on the typical gold portfolio while the average gold stock has just rallied 50-100%, speaks volumes about failed tactics.
  8. Let's leave behind what doesn't work.
  9. And look at some winning tactics: The New York Federal Reserve issued an aprox 65 page report on the chart pattern known as the "head and shoulders". And stated that significant profits can be made through its use. The head and shoulders pattern can take the formation of a top or a bottom.
  10. I suggest readers consider purchasing "Technical Analysis of Stock Trends" by Edwards and McGee. Or go to the library and read the section on head and shoulders patterns.
  11. Chart patterns are pictures. Pictures of price. Technical indicators like stochastics, MACD, trix do what their general name suggests:  They indicate. They indicate whether price might be relatively high or relatively low. They also give buy and sell signals. What they don't do is give specific price targets.
  12. Like technical indicators, chart patterns give buy signals and indicate whether price may be high or low too. They also give specific price targets. For the next wave of price action.
  13. Having a price target is a tremendous tool in the trader's toolbox. A head and shoulders top (H&S top) looks like the name suggests: a human head and shoulders on the price chart. A H&S bottom is the same thing, only turned upside down.
  14. A H&S pattern can indicate a significant price move is to occur. The target is calculated with a simple math equation from grade 2 math. Anyone can do it.
  15. The silver chart below shows a potential H&S bottom. The left shoulder is marked with the green horizontal line, as is the head and the right shoulder. A 2nd right shoulder is marked with a red line. When a pattern loses symmetry, it can be a negative warning signal of failure of the pattern. Thus the red marker. At this point on the silver chart, it is a very small negative. What all metals investors should cheer for is for the whole H&S bottom turn out to be the head of a larger pattern. Whether that happens or not is unknown.

    The strongest patterns morph into what I term "head and shouldering". Where one H&S bottom becomes the head of a bigger H&S pattern. That H&S bottom itself may become the head of a huge H&S bottom on the weekly chart. In rare cases the "shoulders" themselves are small H&S patterns. These patterns portend absolutely massive price advances or declines. A spectacular example of head and shouldering occurred on the chart of the Dow at the 2002-2003 lows. After melting to 7300, the Dow produced a huge H&S bottom, with a minimum target of 10,700. The Dow doubled in price, with the H&S bottom almost rocket-launching the Dow to the 14,000 level.

  16. By January of 2008, a H&S top formation had ominously appeared in the Dow. As the Dow broke its "neck" or neckline, it began a process of head and shouldering. I've drawn in some of the necklines.  Using blue for the neckline on the bottom, red for the top necks. As you can see, the ramifications of ignoring head and shouldering action catastrophic. Those who ignored the head and shouldering action in the Dow received a financial broken neck.
  17. Common technical chart patterns include:  The Triangle. The Rectangle. The Double Top and Double Bottom. There are many others, some occurring only very rarely but with spectacular implications. Like the broadening top in the Dow in 1929.
  18. 99% of market technicians that follow chart patterns, enter their buy and sell orders when the classic buy and sell signals are given. Sadly, most fail to generate consistent profits. Their repeated "small stoplosses" add up to very large overall losses.
  19. Why?  I mentioned the report on the head and shoulders pattern written by the NY Fed.
  20. The bankers follow technical patterns too. Very carefully. They see the orders in the market placed by the large technical trading funds. A "battle of the black boxes" goes on. The funds try to hide their buy and sell patterns from the bankers. Using additional "black box algorithms" to hide their trading black box algorithms.
  21. Patterns "fail" more frequently today than in past years. Frustrating traders. Some have become so disenchanted they place orders in the opposite direction given by the chart signal. They don't fare any better. Because prices often eventually rise to the chart target area after giving multiple false signals.
  22. If you want to place your technical trading "head and shoulders" above the crowd, you have to use tactics not used by the crowd. If the crowd is losing money in gold, you will lose money too, if you do what they do. Regardless of whether gold is eventually going to $6500, failed tactics mean you may not survive the journey to the pot of gold.
  23. What I'm seeing on the gold chart right now is going to shock you. I see a potential flag pattern. Not a big one. A MONSTER.
  24. A flag on a longterm chart in a major market is an extremely rare occurrence. Some technicians say it is impossible. I don't believe in the word impossible in markets. Markets can do anything at any time. They can go to infinity. Or to zero. The question isn't where they are going. The question is:  Regardless of what happens Are you prepared?
  25. The target of the flag is an incredible $1700 an ounce. Basically a doubling of the gold price from current levels. 
  26. Many gold stocks could rise by 500% or even 1000% if the flag plays out.
  27. Ever watch Star Trek? The Enterprise Space Ship blasting through space. Like gold blasting to $1700. Was it a smooth ride across the universe for the Enterprise?  No.  It was a day to day battle with many horrible surprises. In the market, surprises are risks. Risks that need to be managed. Professionally.  With the wrong approach to managing both the risks and rewards that come with the flag pattern, you may not only miss the ride, but find yourself at gold $1400 with a gold portfolio in the red!


Stewart Thomson
Graceland Updates
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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

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