Fed Creates Parabolic Move in Gold and Silver

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"The most dangerous trade is the painless trade."

After trading through both bull and bear markets and witnessing hysterias and panics I have learned that whatever method you use to buy stocks, you must have a discipline to sell. When I buy I look for support levels and oversold conditions so that a reversal could bring about a major gain and the downside risk is calculated. As I wrote in my buy signal in gold in late July, the conditions were ideal for a major move to the upside. Now the conditions are reaching the extreme opposite, it is overbought and surpassing measured moves and upper resistance lines, which mark prior turning points.

GLD 11/8/10

Most traders become reckless at extremely overbought levels and are often stuck when markets correct to find support. They abandon their methods as their accounts grow in value and do not factor in how events may change. Right now, gold is the easy trade as most of the reports from the media outlets are bullish for gold and silver in light of QE2; but is it the prudent trade? Could events trade in Washington or globally which could put short-term pressure on commodity prices?

The most dangerous trade is the painless trade, when siding with the consensus. People have a herding desire when coming to the market. They feel most comfortable when others are doing the same. This is the characteristic, which is the downfall for most traders as the market humbles the greatest number of people. The best trades are the uncomfortable ones, when you go against the crowd. The best way to remain emotionless is sticking to a plan. If one has a method he can avoid the psychological challenges that the markets present during panics or hysterias. Although it may not be popular, it eventually works out as the panic subsides.

Many investors are now buying precious metals aggressively and borrowing on margin, which I believe is too late and dangerous. Many are concerned that they have missed the boat and are panicking into the gold and silver market. It is important to have a technical mechanism to move to the sidelines as late comers chase the market higher. The volume on the Silver ETF (SLV) is reaching record highs and I am concerned of a climax top. It is very hard to sustain a move of this magnitude without a major correction. Although it takes courage taking profits during a bubble, I have learned through many experiences how important it is to stick to a method and sell into strength. There is significant risk of a correction and limited potential on the upside short term.

After being in the precious metals markets for years, I have learned its volatility. I have seen great euphoria followed by panics. Gold and silver is reaching a euphoria level, so stay tuned for any signs of weakness, which may trigger sell signals on any of our core mining positions. Please check out my blog and free newsletter at http://goldstocktrades.com/ where I post up to the minute observations.

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