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November 23, 2009

Time Continuum

Seasonality won the day as equities spread a bit of Thanksgiving bliss to slobbering bulls. Despite the positive bias for the holiday week, I find the current setups rather dangerous for holding either a strongly bullish or bearish bias. While our rally is long-in-the-tooth and several factors discussed last week point toward impending correction, bears could be surprised by a final blow-off, especially if the dollar decides to give us a panic ending move once and for all.

u.s. dollar index

Banking shares will also provide some clue as they eventually get squeezed out of this wedge:

banking share index

Precious metals again posted strong moves, but the important takeaways include the facts that silver coughed up most of its early gain and palladium, which has been a leader in this leg of the run, is now lagging. Add the fact that gold miners keep sporting bearish candles... one of which will eventually have the expected effect... and one has to think we are very close, time-wise, to a correction.

gold mining share index

I suppose miners could just keep climbing the upper bound of an expanding wedge, but I'm certainly not expanding my positions. The risks of a significant correction are high at the moment.

I know on one hand it is tempting to chase gold and precious metals assets here, but successful trading is more about patience than action. I would rather sit around and wait for a solid setup on which to pounce rather than try to call every wiggle in the market. It is easy to be distracted by price changes since we gaze at charts every day. However, we traders must conceptualize our activities in the time continuum, not the price continuum. The goal is to execute successful trades, and what price does in between those trades is inconsequential to everything except the predictive value it provides. In other words, fear of missing a move can overwhelm a trader emotionally and cause the trader to miss something far more valuable: the right setup at the right time.

The setup I am presently hunting is the inevitable corrective period that divides the first and second bull runs of a parabolic move in gold and silver. I strongly believe we are not only in the midst of such a move, but are about to witness the most powerful end to such a run so far in this bull market. My plan is to get levered into the correction in a more aggressive manner than I have during previous runs. One may ask why not just get your position now and wait? The answer is nothing but a paraphrase of the methodology described above. The manner of the corrective period will provide the necessary confirmation to enable me to take my leveraged position. In other words, I am waiting for the setup rather than trading in fear of missing the move.


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