Optimistic Channel Charts (8/20/2016)
Buy low! Sell high!! That market advice is infallible, if only we can guess what prices are low and high. My way to make those guesses for myself is to extrapolate previous market action into a projection of where prices may go in the future. That is a long winded way to say I draw lines on a chart. The lines that are most useful to me are channels that form with lines through market lows and highs. For example, here is a logarithmic scale chart of gold this year.
I drew a line under the lows this year, and a parallel line through the highs, to form a channel. Obviously, the lines I drew offer no clue about whether the price of gold will be higher or lower in the weeks ahead. The value of the channel is not price prediction, but rather it is a viewpoint into what prices are low (for buying) and high (for selling). My rule of thumb is that I can buy when prices are low (in the bottom third of the channel), and I can take profits (if I want to) when prices are high (in the top third of the channel). The middle third is a no man's land for me, and I view the price gyrations near the middle of a channel as noise to be ignored.
In the gold chart above, the channel bottom line rose from a low of $1,050 to $1,300 now (all prices I use here are approximate). The channel top line is now around $1,480, so the channel width is currently $180. My one third guideline says I could take profits if gold rises into the higher third zone of $1,420 to $1,480, and I can buy more if gold is in the lower third zone of $1,300 to $1,360. At the current gold price of $1,341, my guideline would allow me to buy more in this lower third price zone.
Few would be surprised to hear that I also drew channel lines on the silver chart, but the shape of that channel is unusual.
The line below the price lows increased by 25% (the same as for the gold chart), and is now around $17.20. However, silver has been so strong this year that its channel top line increased a phenomenal 45% to $21.80 now. The width of this silver channel now is $4.60, so the current one third buy zone would be $17.20 to $18.70 and the profit taking zone would be $20.30 to $21.80. At the current silver price of $19.20, silver is in the middle zone where I would neither buy nor sell. I update these and more charts each week.
Gold and silver are in a price correction now, and the summer seasonals pattern has frequently seen lower prices for metals around this time of year. Silver has been much stronger than gold earlier in the year so it would not be surprising if silver corrects more strongly than gold over the next few weeks. I think it is reasonable to hope that both gold and silver will continue to correct to much closer to their channel uptrend lines. My game plan is to have my buying power ready so I can buy into a dip closer to the channel uptrend lines. Needless to say, all readers should DYODD so they can make their own decisions. Good fortune and the best of luck to all. Cheers!