Gold Reaction Or Gold Over-Reaction?

There is no more certain way to be right than to make two opposite predictions.  Therefore, ONE must come true.  And so it was last week with this now humble publication.

At first, as we gave an overview of the Gold market's technical picture, we formed a near-term bearish conclusion (http://markostake.blogspot.com/2010/02/technical-review-of-gold-and-silver.html).  Then, two days later, we crowed that the Gold picture had brightened considerably (http://markostake.blogspot.com/2010/02/gold-picture-brightens-considerably.html).

In each case, the pronouncement turned out to have correct and incorrect elements. After the first piece, the Gold market rallied smartly.  After the second piece, the Gold market plunged!  Now that we've taken a big bite out of our hats, let's revisit the entire Gold situation for use from here.

The first piece was basically correct.  There WERE danger signs that the correction in Gold, Silver and affiliated miners had NOT completed their retracement phase.  But, the rush to follow with the second piece was pre-mature, although it, too, was somewhat correct in that the picture HAD brightened and, despite the tremendous volatility of last week, continues to strengthen. 

NOW WHAT?

The danger period for Gold, Silver and mining stocks is either over or very close to over.  Friday's trading witnessed a large number of mining stocks completing "outside day reversals".  As an outside day refers to a bottom, it occurs when a stock or index trades LOWER than the prior day's low and then closes HIGHER than the prior day's high.  Some technical analysts refer to this as an "engulphing pattern". 

Going back to Friday, the outside day reversal is a VERY POWERFUL change of trend indicator!

This means that the odds of a low having been reached intra-day Friday are excellent!

The overall pattern forming is that of an A-B-C correction, where downward waves A and C are of roughly equal length and interrupted by a "counter trend" wave B.

It's time to buy.  For those that are new to the site, I would like to re-iterate the better vehicles.  First, I would AVOID either GLD or SLV, which claim to be backed by physical Gold and Silver, but may not be.
If you wish to invest in a bona-fide metals backed fund, try CEF which is backed by both Gold and Silver.
The only problem with CEF is that it often trades at a premium to its underlying "Net Asset Value" (NAV), so you have to be careful not to overpay.

I prefer GDXJ, an Exchange Traded Fund (ETF) basket of about 40 junior Gold and Silver mining stocks.  It has a very decent selection of miners within it and for most people it will prove to be an excellent way to play the next MAJOR move higher, which ought to start any day now, if it hasn't already started.

I don't think it impossible for the precious metals market to back and fill for the next few days, especially Monday.  However, I highly doubt that it will take more than 2 or 3 days to complete the entire corrective phase from $1,200.

Tomorrow, we'll revisit the stock market, which STILL looks like it is in the very early stages of waterfall decline or crash. 

If you think my logic is less than golden, you know what to do.  TAKE ME ON!

Marko's Take