Monday, July 18, 2011


We had a couple of good posts in reaction to my weekend commentary as well as a few emails directly to me. First of all, we will never all agree, and if we do I can promise you I won't act on whatever that view is. I don't like crowded trades even if that means missing some. I think most readers know I am a short term trader, I generally hold trades from 3 to 15 days unless I get stopped out quickly on something. My larger picture comments are more based on my experience having watched and traded financial markets for 25 years. My view of the metals bubble which I know most do not share, a reason I like it, is based on price action alone. It is not based on any opinion about the fate of our dollar or any other arbitrary assessment I might have at any given time on some economic development. I trade short term and generally with what the trend is while occasionally going against them in the conditions I have discussed in here in the past.

My basic point about the metals can be summarized by just looking at the monthly chart of Gold above. Does this really look sustainable? How many other instances in any market in history can you show me where a move like this continued on for years and tripled in price from here? I will save you the trouble, there are none, ANYWHERE.

This does not mean that this cannot be the first, it has already defied the odds for awhile. However, readers need to understand the basis for my evaluations and how I arrive at them, hence the Instruction Manual title. I study price patterns and ferret out the ones that have the highest probability of repeating. Once I have found them, I tailor an entry technique that also has a statistical edge to that setup, and away I go. This pattern here no matter how I study it be it a 5 minute chart, daily, weekly, or yearly, is a climax pattern. What does that mean?

It means that we have a runaway frenzy that is accelerating into the equivalent of a jet burning all of it's fuel. It is very difficult to determine when gravity will kick in. I will promise you this, if you just looked for every pattern that looked like this and bought it you would lose everything you owned in 30 days. This does not mean that you would not be in a profitable position at any point, you very well could be by a large amount like with Silver. However, once you get this type of action the odds do not favor it continuing. Is is not any more complicated than that. I trade in what my studies show are high probability situations, and this is not one. It is not a short sale, trying to short these types of moves is crazy. ADX is now at 51 with the last 11 consecutive days being up closes, again another danger zone. ADX can and does go higher than this no doubt, but it is a warning signal that at least a pullback is coming. This is my reason for calling this a bubble, it is a climax pattern in the price, pretty simple.

If your view is that you are sure the fiat currencies are going away, then you obviously will have the opposite view. My opinions are based on price pattern history and COT data. Opinions mean nothing, it is how much money you make off trading that matters. If you are long and making millions, good for you. I wish everyone success in trading and it is why I do this blog everyday, to try and help with that. Please just keep in mind, there is trading, and there is expressing opinions, they are not the same. I do not and never will trade on my opinions. If you are able to formulate opinions and trade off them and have success, you are far more skilled than I am. I tried that in my younger days and failed.

Net net, maybe I am wrong about this, but my reasoning is simply based on the data, not an opinion on economics. Thank god I am not an economist! For those who don't think it is a bubble take out a second on your house and double your bet. If I was as sure as so many we were going straight to $5000 that is what I would do. Maybe I just don't get it. I would sponsor a pullback buy, like the one marked on the chart, but not one right here.

I know the one comment was also about the bubble in interest rates. Ironically I think if we take out today's high on Tuesday, the 10 year notes are a buy. I really don't know if this market is a bubble or not, there are certainly good arguments for it being one. However, the price pattern does not indicate that yet, so I don't view it as one. If the price pattern winds up looking like GOLD above, I will also view it as a bubble at that time. My studies show that patterns like this if the high goes the next day are good buy signals, so that is what I am looking at. The COT report also shows good buying in this market right now, which supports this trade as well.

I am sure the one reader who has the opposite view of these would say I am being inconsistent here. My views on these are both on the price patterns, not the economics so they are consistent. My studies show that 11 days up in a row is not a buy, very clearly as we have with Gold. On the other hand they show these reversal bars like this when they reverse back the next day are good buy signals. It is that simple for me. Maybe I am wrong on both of them. If I am no be it, I am a trader and I will move on to the next decision knowing I will get some things wrong.

I have had a few spectacular winning streaks in my career, and they are not easy to handle. Once they start carrying on the second guessing hits hard. I had one with 39 wins in a row, and one with 22 in a row in my old trading service. Once you get that many you just want to have some losses to get back more in balance. I recently had another pretty good winning streak and knew I wanted to get a loss in there to level the field. This might seem like negative thinking but it is reality. Perfection is not necessary to trade profitably, and if you strive for it you will not have success trading.

I am still hoping for some type of bounce in stocks to get good sell signals in the Bernanke's. I passed on a sell for Monday because some of my filters said no, so I am hoping we get a bounce for a day or two to set up a sell.

I hope I have made the basis for my commentary clear, and also hope it was done in a way that was not offensive. I just want to make sure readers understand where I am coming from. I know new people come in all the time, so I never know how long or how far back people might be reading, to get a feel for what my approach is. I am constantly studying conflicting views, I don't learn anything from talking to a bunch of Ed McMahons.

Good Trading


Konrad Sherinian said...

Chris - another great post. I think the gold bugs are basing their "optimism" on the view that Jim Cramer is now espousing; i.e., that Gold will replace the $$$ as the world's reserve currency. They may be right, but, as you point out, it will not be a straight line to 5000 getting there. Undoubtedly, there will be much better entry points than trying to jump into a market that has gone straight up since the 4th of July.

Incidentally, I caught up on the last 10 posts or so - count me as passenger #1 for your new airline!

Anonymous said...

Good post as always chris...Great work...

BQ " bquigs "

Anonymous said...

...what surprises me the most is why u bother listening to the Small spec's at all,as their track record is horrible ,Roughly 80 % cant trade .We are in the 20 % bracket,we have taken the time and bother to learn this stuff....Silver and Gold will crash long term , problem is when , meanwhile we have trends to milk, so i couldnt care less either way, as i will be shorting them both in time .Until then Good Luck to all traders, long and short...

BQ " bquigs"

Chris Johnston said...

I am not sure I understand this comment. Small specs are to be faded not followed I have never indicated otherwise.

Anonymous said...

Your commentaries are great. I found you some how about 2 months ago maybe longer and I have learned a lot. I too read a lot of Larry William's material and took a few courses/seminars and even lived in SD in the 90's. But I must be a slow learner as I have not had near the success of you and others and, in fact, have busted out twice. Forrest Gump was right: "Stupid is as stupid does".
Anyway I am long physical gold from $1011 and silver from $15 and change (both average costs). As a trader I should count the profits and wait to buy later but having lived through the metals bull run of 1979-1980 I am still long because none of the mania that existed back then is in the market right now. There are so few people who actually own gold and silver it's mind-boggling. Prices are not being quoted nightly on the 6 PM news as they were back then either.
What I see as different this time (I now you hate that phrase)is that 30 years ago the demand was all US based and there was an interest rate issue but none of the fiat currency talk and none of the debt issues that now plague governments world wide (thanks in large part to the corrupt Banksters).
The demand for G&S this time around is as a safety valve against the collapse of these currencies and debt ridden governments to say nothing of the industrial demand which exceeds supply in the case of silver. More than anything though, to me, is the fact that demand is world wide this time around.
Granted these are fundamentals and you trade on technicals and rarely do the two meet. While I can see Gold correcting back to 1400 and even 1200 as a trader; but I can also see the fundamentals carrying it to 3000 and for silver a pull back to 33 and even 27 is possible but so is $100 based on what I alluded to above. If these prices are reached it will be in a very zig-zag, gut wrenching fashion. A bubble is coming but I just don't see it as a bubble now given the character of the last metals bubble or the character of the last few bubbles - dotcom and real estate. And a bond bubble is brewing too, probably after the prro fools who dump stocks and foreign currencies and debt for the so called "safety" of US debt and dollars.
Maybe both sides will be correct. I just feel that the world is a much different place today than it was 30 years ago and like your comment the other day, I too am investigating relocating to another country. That's almost heresy coming from an Army vet and entrepreneur and that is how different things are in my view.
Keep up the great work.
Don in Virginia
(almost close enough to DC to smell the cesspool)

Anonymous said...

I was basically talking about the fact that many small traders ,small specs,are replying to your blog in here and are voicing their opinion ...hence the nonsense banter.


Chris Johnston said...

First of all, we have some good exchange going here which is great. Everyone has the right to their views, and that is what makes trading what it is.

BQ, your comments are correct. One of the things when you put yourself out there like this in a blog that you have to realize, is that you get all types of visitors. I have no way of knowing who is what, and also many are also not who they represent themselves to be. You can't get too thin skinned, so I try and address any views that are submitted. For all I know the folks with the theories on why it is different this time are correct. Although history tells us it usually is not, at times game changers do happen. Maybe this is one?

Don, great comments and I am glad you are taking the time to read here.

Return to Resistance said...


Re: Gold

From a shorter term perspective the metals are probably due for a rest, although I still think there's more upside before that IMO.

Having said that, from a longer term perspective this market has a lot more upside, and history has proven that in a bull market prices can go much higher from here. Gold is up about 600% so far from it's 2001 lows.

The 70's bull market saw gold increase 2400% so I see no reason why it can't make a repeat of that considering the fundamental drivers which I will get to in a moment.

I looked at some charts from the 90's tech bubble to illustrate an unsustainable rise and will share the MSFT chart:


Coincidentally, this stock increased about 2400% over it's 7-8 year bull run. The monthly RSI stayed overbought for three straight years!

Anyway I think you bring up a good point on time frames. From a short term perspective you can get a different view than from a longer term perspective. For me, it always starts with the longer term perspective to make my trading decisions. I have made the most money by buying a bull market trend on the dips and just sitting on the position for years.

IMHO, the longer term perspective brings in the very good chance of hyperinflation, not deflation, and certainly not something in between those extremes.

I'd like to share a blog that weighs in on the hyperinflation/deflation debate, it's a long post but this person has done the best job in explaining the reasons for hyperinflation sooner rather than later. The conclusion is the result of deductive reasoning and not some arbitrary fear mongering.

FOFOA's Blog


Chris Johnston said...

I have mixed emotions on letting this last one through since I am not going to get into this debate but just in case some readers are interested I decided to post it.

All I am concerned about is making money trading this macro stuff is of no value to me even though it can be fun to argue about. I am a short term trader. Apparently you are doing well with this so it is what you should stick with.

Some unknown all star who may have some macro economic view is of no interest to me, most of those guys don't even trade and the ones that do lose money. This is all about the Benjamins to me. There are alot of smart people that lose money trading.

Let's move on.

Chris Johnston said...

Not at all charles is friendly to me and has links over to me. I get so many of these check out this link etc.. and it is always paper champions who have never made a dime telling everyone what they should be doing.

My feeling is that if you can't do it yourself, you should not be telling others how to do what you cannot.

I hope that link was not to Charles, I did not even look at it. If it was and Charles you are reading this, my apologies.