Seasons Greetings ! ! ! Published 12/15/05.
Silver and gold plunged this week, and that is great news! Prices previously reached levels so high that it was becoming difficult to even justify buying physical metal for a long term hold. Now that prices have retreated significantly, we can all resume buying as much physical metal as our hearts desire, without the guilty feeling similar to that which often follows splurges in an all you can eat restaurant! It is truly wonderful that the markets offer this buying opportunity in the middle of the holiday season. If hedge fund hacks, COT commercials, and market manipulators have engineered this sell off that now enables me to buy more silver and gold again, then please relay my sincere thanks to those very generous people!
Forcing Profits
Over the previous two weeks, silver and gold prices ascended into the Optimist's red zone where it is mandatory for him to take partial profits. The Optimist imposes that rule on himself because it is painfully difficult to sell positions which are rapidly gaining in value. Even though prices may have advanced substantially in the previous weeks, we optimists are ever hopeful that this might be the big one where prices would quickly explode and more than double during the next week. With that optimistic mindset, a mandatory rule which forces me to take at least a few partial profits is a valuable addition to my trading plan.
Fear, Greed, and Greedy Fear of Lost Profits
Most market observers recognize the perils caused by the fear of losing money as a market moves against your position (an emotion that commands you to sell all your positions near the bottom of a move) and greed (which beguiles you to buy too much near the top of a move). A third emotional roadblock to success in the markets is the fear of selling a winning position and thereby losing all the additional juicy profits that would have been there if the position was not sold. That fear of not making all of those additional profits we are so sure are just around the next corner can trap us into greedy inaction precisely when we should be executing the partial profit taking portion of our trading plan.
Buy or Sell Monday Morning?
Several of the precious metals market soothsayers that we have all read intently are sure that silver and gold are great buys today, and we should be fully invested. Other market analysts are just as certain that the blisteringly hot move up since August is now history, and we should sell before prices fall further over the next five months. Buy or sell? What to do?! The Optimist can feel that all eyes are turned to see his definitive opinion about whether readers should buy or sell now, next week, and next month. I can rise to the occasion and offer a clear and unequivocal "I don't know!" The world wide markets for silver and gold are ten thousand ton elephants that can stampede uphill or downhill as they please without regard for the Optimist's guesses.
Having dutifully cautioned everyone to not make any trades based only on what the Optimist says, I can share with you my current viewpoint and a hope I have for the next month. First, I will neither buy nor sell any stocks on Monday morning. Although the silver and gold corrections this past week were sharp, both markets only receded from my overbought red zone (where partial profits were taken) back down into the yellow zone (where the Optimist makes no trades). The yellow zone is a good place for accumulating more physical silver and gold, but is not well suited for the Optimist's paper trades, such as buying or selling stocks, futures, options, etc. The Optimist views now as a great time for patience, and for waiting to take partial profits if prices rebound higher into the red zone or for buying more if prices fall further into the green zone.
A Simplified Elliott Wave View of Silver
I have hope, however, that my wait may not be too long. The chart of silver shows that the wave up since August looks similar enough to rhyme with the silver move from July 2003 to January 2004. That earlier market move had a modest wave up (1), a small corrective wave down (2), a strong impulsive wave to top of channel (3), and a bone crunchingly sharp correction (4) which was fortunately brief and shallow. The Optimist sees a similar pattern in the current wave action from August 2005 to now. If this price action continues to rhyme with the pattern of two years ago, we might expect the drop from this past week to have mostly completed the first down part of the correction (4a?), and prices would soon begin to rise again over the next two or three weeks to perhaps as high as a double top more or less (4b?). If so, then that rise toward a double top will return silver (and undoubtedly gold too) to the red zone where I must again take more partial profits. Once I am armed with an ample supply of fiat cash from taking partial profits, I can dream that silver prices would finish this dance by dropping sharply toward the $8 level (4c?) within a few weeks from now. That would put silver back into my green zone where I can buy back all my original positions and more to reinvest my partial profits.
Will the Silver Rocket Launch into Low Earth Orbit Again?
A quick look at the fifth wave of this silver move, from February to April of 2004, shows why I am salivating into the keyboard as I type this commentary. Silver exploded almost 40% from the wave 4 correction low of $6 to a blow-off wave 5 high of $8.32. A similar 40% wave 5 rise next month from $8 would thrust silver to more than $11!!! I have labeled the wave from two years ago and the current wave with this simplified Optimist Elliott count, and I will keep that count in my dreams and on my weekly silver chart until subsequent price action proves that my hopes were misplaced. Until then, however, this Optimist will have non stop visions of wonderful holiday gifts all brightly decorated in festive silver and gold wrappings!
Happy Holidays to all ! ! !
* * * Notice * * *
This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment. Please do not interpret any portion of this work as investment advice. If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest. The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions. The Optimist wishes you the best of luck in whatever you decide to do or not to do. Cheers!
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