Introduction

On November 16, 2005, an article was posted titled: The Charts Are Talking. Who's Listening? Today a similarly titled paper is presented, which discusses the opposites message of the November article.

In the first article, various charts were offered that illustrated a preponderance of cup and handle formations, of both the gold and silver indexes, as well as the charts of the major precious metals companies.

It was stated that the charts were in the process of forming what looked like a breakout.

For example, here are the two charts of the XAU and the HUI precious mining indexes that appeared in that first article The Charts Are Talking. Who's Listening? Notice the date of the article is November 16, 2005, which is before the recent breakout in the precious metal stocks:

 
Charts Courtesy of StockCharts.com

Breakout Pending

The article stated that:

“The cup and the handle formation can be clearly seen on these two charts as well. There is no guarantee that the formations will be completed – there never is. But the present chart patterns strongly suggest that a breakout is pending.”

“It is a good omen to see that two of the premier silver stocks are replicating the cup and the handle pattern as well. This lends more support to the likelihood that the patterns are for real, and that they will be confirmed by breakouts to new highs.”

Considerable Profit Gains

Below are the current and updated charts of the XAU and the HUI indexes for February 1, 2006, which show the recent breakout that has occurred. Notice that on November 16, 2005, the XAU was consolidating between 110 – 115, and today it closed above the 150 level.

 XAU INDEX HUI INDEX

Charts courtesy of Quote.com

The HUI back in November was at the 230 to 240 levels, and today it closed over 340. The HUI has forged ahead with +40% gains in two months time. Many individual gold and silver stocks are showing even greater percentage gains.

However, some of the charts are also beginning to look parabolic, which often cannot be sustained, and warrants the better part of discretion, as opposed to valor.

Pan American Silver Corp.	Royal Gold Inc.

Charts courtesy of Quote.com

Increasing Notice

Gold is starting to be talked about in the mainstream press. It now gets airtime on CNBC, written up in the Wall St. Journal and Forbes; even gold’s archenemy, JP Morgan, gave a bullish buy recommendation yesterday. Such attention warrants a pause for reflection.

This does not mean that the current rally is over, as no one can predict the future. Nevertheless, many of the precious metal stocks are extended.

In bull markets, however, stocks can stay extended for longer periods than appears reasonable. That is because markets are not reasonable – they are the exteriorizations of man’s inner emotions of fear and greed.

More To Come

It is still early in the precious metals bull market. Stage two may have been entered, but then again it may not have. In Gold: Stage One or Two? It was stated that breaching the $500 level was tantamount to confirming that a true bull market was unfolding.

Now that that level has been bettered, all that remains is for a higher low to be put in place during any subsequent counter trend correction – especially if the $500 dollar level now becomes support, as opposed to resistance just prior to the breakout. If such occurs we are without question in stage two.

Frankly, it doesn’t matter whether we are in stage one or stage two – all that matters is what price we get in at, and what price we get out at. Gold and silver are in bull markets that have as much left to them as has already transpired.

In the November article – before the recent rally began, it was said that:

“The precious metals markets have been tough of late. Last week they were forming a wedge patter that looked like it was a perfect set-up for a break out. What did the HUI do – it broke down. Then Friday of last week the precious metal stocks reversed course and broke out of their wedge pattern. Now on Monday and Tuesday they appear to have broken down again.

Personally, I don’t know which way they are going to break it doesn’t really matter. If they break out, I will sell into the strength, and if they break down, I will buy into the weakness. That’s what one does in bull markets.”

Sell Strength & Buy Weakness

That is what disciplined traders do during rallies in bull markets: they sell into strength, and buy during weakness. This is how one prospers in a gold war. If further upside action occurs, we will continue to do the same with a minimum of one third, and a maximum of two thirds, of our trading portfolio.

That does not mean that a correction is going to start tomorrow, as once again, no one can predict the future. What it does mean is that to stay disciplined and focused, by selling into strength, and buying on weakness - that is what matters: money management and asset allocation.

By being cashed up and booking profits during strength, one is better prepared to take advantage of the correction that inevitably comes. When the enemy is at its weakest point is the time to attack. At such times valor takes the initiative and discretion stands by – out of the fray, waiting for its call to action.

All moves get corrected, be they to the upside or downside – no matter what the strength and or duration.

Conclusion

As always, it is a matter of timing. Perhaps we got in a little early back in November, but actually we had gotten in back in May and June, during November we simply added more positions. Perhaps we are getting out a bit early in February. Time will tell.

However, no one ever lost money by booking profits at a steady and reasonable rate, and percentage of their portfolio. It is simply business. It is simply taking what the market offers.

This is not to say that one should run out and sell all of their precious metal stocks. We are simply stating what we see in the charts. It is up to each individual to do what they will with their hard earned money, but profits are not profits until they are booked. Parabolic moves usually end the way they started.

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