This essay is based on the Premium Update posted on May 16th 2009. Visit our archives for more gold articles.

As traders we are at times tempted to dive into the deep end and hope that a life preserver will be waiting for us in case we we need it. But that kind of attitude can lead to going under and swallowing a lot of water. Experienced traders know that at times the best action to take is no action-- to sit on the sideline and wait for the right opportunity. In other words, at times, the smartest thing to do is - nothing. More trading doesn't mean better trading. Keep in mind that markets can remain irrational longer than a trader can stay solvent. In these stormy waters this simple wisdom is more important than ever.

In this harsh economic environment it is more important than ever to make the right choices and look reality squarely in the eye. We scan this harsh investment landscape for trading opportunities that will help you find the right wave and ride it to profits.

In precious metals and several other important markets, this week's theme is that although much has happened, little has changed. In the previous essay, I wrote about the testing of the support lines. I posited that we may need to see gold verify its recent resistance level as a support, before it can move higher. We have seen the testing patterns in several important markets, but the results are not yet verified, which is why patience is important. If gold and other markets verify their previous trend lines, we will have a particularly favorable situation to enter new speculative long positions. Naturally, there are also other factors that need to be considered that are not mentioned in the publicly available version of this essay.

For now, lets take a closer look at the charts (courtesy of stockcharts.com).

Gold

This week I want to begin with technical analysis of the precious metals markets.

Last week I wrote that gold is likely to test its recent trend line, before moving substantially higher. This move has not yet taken place but is still highly probable. Wednesday we had one day of testing, but it was insignificant, a blip on the radar, when compared to the size of the pattern over several months.

Gold is reaching a 50% Fibonacci retracement level and a new high has been made on small volume. I consider that to be a short-term bearish signal. Prices often correct half of the preceding move before resuming their main direction.

USD Index

The USD has broken through its trend line, the 200-day moving average, but the 38.2% Fibonacci retracement level has been pierced only temporarily. This may mean that we will not move lower immediately, but will rather test previous trend line (this time as a resistance line). The area in the chart marked with a red ellipse marks the spot that may stop the upswing - if one will materialize.

This is even more evident if we take a look at the weekly chart.

Here, we see clearly that the USD has not broken through the first Fibonacci retracement level - a confirmation of what I wrote above.

Other Markets

Let's move on to analysis of the other markets influencing the PM sector. We see that the precious metals sector: Gold (-0.7), Silver (-0.89) and HUI Index (-0.85) have been mostly moving in the opposite direction to the dollar in the short term (30 days column). This indicates that when analyzing the precious metals sector, one should not forget to estimate the direction in which the U.S. Dollar may go next.

The correlation with the general stock market (the S&P) is smaller, but is still significant in silver and PM stocks. This also means that they can be hit harder if the S&P plunges. You can find more about the methodology used here by reading this essay. I would like to remind you that the 10-day column is not statistically significant, and is just a very rough estimation, which we should not use for making important investing decisions.

Summary

As I previously said, if there is something that I have learned in my years of trading it is that sometimes the smartest thing to do is - nothing. Right now Members of our Premium Service are already well positioned in the precious metals since my suggestion to complete long-term purchases near the April bottom. Our position is still in sync with gold market signals. We have had a breakout and it is a significant development, no matter what happens in the short term. We may have a correction from here to the $900 level in gold, and to the $12.50-$12.60 area in silver, but these will not be a dramatic moves from a long-term perspective.

At the risk of repeating myself I would like to point out that as far as the overall long term growth of your capital is concerned, the risk is to be out of the precious metals market, rather than to be in it. I realize that waiting for a correction with most of your holdings is tempting, but I don't recommend doing so, simply because the risk of missing out on a big move up is too big. To put things into proper perspective - if silver were to go above $100 in a few years, would it really matter if you got in at $13.50 or $14?

To make sure that you get immediate access to my thoughts on the market (including information available only to Members of the Premium Service) I suggest you sign up for my free e-mail list. Sign up today and you'll also get free, 24-hours of access to the Premium Sections on my website, including tools and charts dedicated to PM Investors and Speculators. It's free and you may unregister anytime.

P. Radomski

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This week we have seen the testing patterns in several important markets, and in this Premium Update we comment on that paritcular situation. As always, we present our thoughts on the precious metals market in the long- and short-term perspective