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September 8, 2010

Get Ready for a Ride

As precious metals and their associated equities flirt with major breakout levels, those of us positioned for a big run need to be mentally prepared for what is to come: huge volatility. Consider the swings seen by mining shares during last year's run out of the summer low, which ultimately tacked 55% onto the XAU:

XAU 2009

Traders with weak nerves or over-leveraged accounts were hard-pressed to hold their positions through such moves, particularly during the head fake seen at the November low... just prior to a 27% surge into the peak. Given the size of the basing patterns we've been witnessing for mining shares and precious metals alike, the next run higher is likely to dwarf the 2009 move. However, markets certainly do not like to make it easy for traders to hold through large moves, so expect the shakes to be even more rigorous.

Fortunately, we have a tool to help guide us through such times: cycle analysis. Let's have a look at what gold cycles told us during the 2009 run:

Gold Cycles vs XAU 2009

As you can see, the troughs of each of the nasty XAU shakeouts occurred deep within gold's timing band for a daily cycle low. Traders seeing their account balances in retreat were panicking out of shares while those watching the gold cycle were calmly buying from them. Furthermore, when the public was chasing price into the December high, cycle watchers realized that the intermediate cycle, then on Week 17, was getting long in the tooth. It was time to take profits, not add to positions!

In the Member Area of The DOCument, I keep readers apprised nightly of cycle interpretations as well as my personal trades. The Techniques and Case Study sections help readers learn more about cycle analysis, along with proprietary tools I developed to supplement cycle interpretations and improve the accuracy of the analysis. We gold bulls have some exciting, but volatile, times just ahead. Let's keep our heads cool and trade wisely.


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