Over the past five months gold has fallen sharply and is no longer headline news which it once dominated back in 2011 when it was making new highs every day. The shiny metal has been under pressure because traders and investors started to pull some money off the table to lock in gains. Gold prices had surged so fast most advanced traders knew that final high volume surge was not sustainable. But the main reason gold topped out in my opinion was because the US Dollar index had put in a bottom and started to build a base. As we all know a rising dollar typically means lower stocks and commodity prices.

I have posted some charts below covering gold in detail using multiple time frames. The weekly which is long term, daily which is the intermediate trend and the 4 hour chart which shows gold momentum and intraday action. At the very bottom I talk about the US Dollar and what is happening with that.

Gold Weekly Long Term Trend Analysis

The weekly chart is not the most exciting time frame to follow as you will grow old watching it. That being said it is crucial for understanding the long term trend, price and volume analysis.

Below you can see that gold’s recent pullback has been a 3 wave correction, which is a normal pullback for any investment. But taking into account the rally from 2008 – 2011 I feel this pullback will have one more low put in before bottoming out. This would make for a 5 wave correction much like what happened in 2008.

Click HERE for Larger Charts

4 Hour Intraday Chart of Gold

The 4 hour chart of gold allows us to see all the intraday price action which would normally not be seen with a daily chart. It also gives us enough data to build our analysis upon.

My preferred setup for gold which I feel if happens will trigger major buying in the yellow metal. If/when we get a rally in gold would also likely mean some more economic uncertainty has entered the market either from within the USA, Europe or China…

Click HERE for Larger Charts

Weekly Dollar Index Long Term Analysis

The dollar has the potential to rally to the 87 – 88 level before putting in a major top. For this to happen we will need to see the Euro crumble (both currency and countries divide) in my opinion.

If you look at the weekly chart of gold and this chart of the dollar index you will notice that gold topped when the dollar bottomed. Over the past couple year’s gold and the dollar have had an inverse relationship to each other.

With all kinds of crap about to hit the fan overseas I think it’s very possible gold will rally with the dollar. Reason being there is way more people overseas who want to unload their euro’s and with all the negative talk and doubt with the US Dollar individuals will naturally want to buy more gold.

Click HERE for Larger Charts

Weekend Trend Trading Conclusion:

In short, I expect a bumpy ride for both stocks and commodities in the first quarter of 2012. With any luck gold will pull back into my price zone shaking the majority of short term traders out just before it bottoms.  And we will be positioning ourselves for a strong rally buying into their panic selling.

To just touch base on the general stock market quickly. I have a very bearish outlook for stocks. If the dollar continues to rise it is very likely the stock market will fall into a bear market. So I am VERY cautious with stock at this time.

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Chris Vermeulen

When you think of the best run companies in the world, what names come to mind? Wal-Mart? Proctor and Gamble? Perhaps Apple? Think of the worst run companies and you might think of a company like Enron, which is now out of business because it was run so poorly.

What makes these large companies good or bad? If you believe the highly paid bankers of Wall Street, running a company well requires the best leadership. Of course, the best people also come at the highest price.

If we compare Wal-Mart, the world’s largest retailer and a model of incredible cost efficiency, with Enron, the once high flying energy firm that ultimately burned out on bad deals, we see that the price paid for leadership meant little. Wal-Mart executives, by Enron standards, are poorly paid. Enron sought the brightest and best and paid them very well. Wal-Mart grows their leadership internally and pays their highest earners with modest salaries. Enron went bankrupt despite their smart and talented people.

What is the difference, does money not buy quality?

With my very limited knowledge of either company, one thing that stands out to me is the difference in systems and processes that each employ. Every task that a Wal-Mart employee is clearly defined and modelled for success. Employees at Enron were allowed to sort of do what ever they thought would help the company succeed. A noble idea, but the lack of standards allowed for individual goals to take priority to the detriment of the company.

From this example, it seems that plan and process take precedence over talent. A disciplined, highly calculated and planned business is able to do well even though it may not have the smartest people running the business. Talent is over rated.

And so it goes for trading.

I have taught aspiring traders from every possible background. The well educated and the drop outs, Mensa level IQs and those who might be referred to as not the brightest bulb on the tree. I have taught those who have already achieved financial success and those who are in pursuit of that dream.

And what stands out, after teaching a few thousand people, is that there is nothing about a person’s background that predicts trading success. When trading, anyone can succeed or fail.

So what does matter? At the very top of my list would be process. Having a detailed, well tested and constructed plan for making money in the market is a must. Every aspect of the plan must be well thought out and based on experience. The more steps in the trader’s plan that are left to human judgement, the greater the chance that the plan will achieve a poor result.

With a good plan, can anyone get the job done? If you ask Wal-Mart, the answer is probably yes. They hire thousands of people to do the various jobs that they employ and could not possibly expect that talent will allow each employee to get the job done. Their people succeed because their jobs are well defined.

What is important is how the tasks are defined. Wal-Mart succeeds in part because they have so much retailing experience. Their employees and management use their experience and resources to develop the very best processes. With those processes, even people who lack experience or talent are able to succeed.

This is exactly how it works for traders. I have seen so many successful and bright people fail in the stock market simply because they did not have the experience to develop the right plan.

Think about what you do in your career. Is your job hard?

Most people would answer no to this question since doing their job is what they are experts at. To the surgeon who has performed 1000 surgeries, the 1001st surgery is not particularly difficult. For the person who has never done one, it is a great and dangerous challenge, no matter how smart they are.

Does this mean that anyone can succeed as a trader if given a good trading plan? No, at least no better than anyone could succeed at removing your wisdom teeth if given a step by step process for doing it. You still need to practice the plan before you can achieve success.

Having a planned process helps us shorten the time it takes to learn something. The Wal-Mart employee or the surgeon can each do their job well by combining a good plan with some time for practice. The Enron employee might have had better success if they had a good plan to work from.

If you do not have a trading plan, stop trading. You might argue that you have done really well in the market over the past couple of months and you therefore do not need a plan. I would respond with some of the examples of people who gave back all their profits and more when the stock market was not working in their favour. A trending market can make the inexperienced look like they know what they are doing.

You can either create your own plan or you can buy one from someone who has put in the time to create a good one. I think that everyone should try to create their own plan because you learn a lot by doing so but, in the interest of time and money, buying a plan is a pretty good investment and a cheaper way to find success.

Your plan must be written down. It must be tested. It must be practiced. All trading plans should evolve with the market and as you gain experience. They need not be complex, simplicity in a plan usually works best. Plan the trade and trade the plan.

I have some concerns about the market going lower next week, there has been a pick up in fear recently as the VXX has broken its downward trend line. The SPY also broke its intraday upward trend line that has been in place since December 20th. The signs are not yet critical but I do suggest some short term caution as the market is due for some profit taking after the Santa Claus rally.

Individual stocks can still do well if they have good stories, we are seeing stocks starting to trade with less correlation to the overall market.

I ran the Stockscores Simple Market Scan this week and found a couple of stocks that look pretty good:

1. T.MGO
T.MGO is interesting, the stock had some big trades made on Thursday and then came to life late in the day on Friday. That tells me that something is going on and the pattern confirms it. The stock is moving through resistance from a cup and handle pattern. Support at $3.95.

2. WOOF
WOOF is breaking out from an ascending triangle pattern with higher than normal volume on Friday, the stock appears likely to continue its upward trend. This is not a fast moving stock, upside potential is to resistance at $25. Support at $20.

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components.

  Disclaimer
  This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

All bull markets have similarities and all equity bull markets have strong similarities. They go through similar phases. Most bull markets start off slow and then build towards what we like to say is an acceleration into a bubble and potential mania. In last weeks editorial we noted how bull markets, prior to the bubble phase, tend to make major bottoms every three or so years. Yet, in looking at the present bull market in gold stocks and comparing it to the previous three equity bull markets (Technology, Japan and Gold Stocks) we find stronger and deeper similarities which confirms to us that the gold stocks are in the bull market of our time.

In examining these four bull markets we find that the typical secular bull market in equities follows a strong pattern. Most would assume that the bubble or mania phase is the strongest connection. While this is often the case its really the start of the bull market and middle phase that follow a textbook pattern. The first phase consists of a fairly strong rise over six or seven years while the second phase (through a correction or consolidation) consists of five or six years of no net progress. This sets the stage for the acceleration and eventual bubble phase.

The Nasdaq began its bull market in 1980 so its first phase ended with the historic stock market crash in 1987. The market rebounded fantastically through 1991 and 1992. However, it wasn’t until late 1992 that the market escaped a five year period of no net progress. Though not shown, it was 1995 when the market began to accelerate into its bubble.

Next we have the Nikkei which shows Japan’s historic bull market. Looking at historical data shows the bull market began in earnest in 1967. The first phase ended in 1973. From 1973 to 1978, the market made little progress. After 1978 things really began to takeoff.

In our next chart we show a rebalanced look at the current bull market (HUI in red) and the bull market from the 1960s and 1970s (BGMI in blue). The time scale is aligned to the BGMI. Note the distinct similarities between each other but also to the aforementioned Nasdaq and Japan.

First, note that each market made its initial major peak at virtually the same time, about seven plus years in. Second, each market endured a major correction though each was different in time and scale. The HUI recovered more quickly but has yet to break away from the initial high. The HUI hasn’t made much progress since 2006 while the BGMI did nothing from 1968-1973. The BGMI made its final low (late 1972) almost five months after its initial peak. It was at that point when the BGMI would surge over the next 18 months to a new high. If the HUI follows the same path and scale then it would make its final bottom within weeks and gain strongly until the fourth quarter of 2013.

From this point forward the three historical bull markets essentially accelerated course and endured one final correction before the mania. The corrections were (BGMI 1975-1976, Nasdaq 1994, Japan 1981-1982).

The only distinction to make is that the gold stocks (BGMI) didn’t have the kind of mania the other two bull markets had. Perhaps that is just because mining is such a difficult business or that speculators concentrated on junior companies, silver and silver miners. In other words, the mania was centered outside of the senior gold companies.

In any event, its important to share these similarities as it shows that the struggles in the gold stocks are right on par with previous bull markets. Nothing that has happened is out of the ordinary. In fact it is only following the pattern of equity bull markets. Combined with the low valuations and low ownership of gold stocks, this is some very powerful evidence of what lies ahead. If you ’d like professional guidance in riding this bull market and uncovering the winning companies then consider our premium service.

Good Luck!

By Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com