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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!
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