CTA Trading Desk Morning Report

In the WIR last weekend, I stated I was bullish but cautious, and would not hesitate to move out of long positions if the market dropped further. Yesterday we sold out of more than 25% of our long positions and added about 20% cash. As for our Guidance and Risk Management System results, the only holdings that the system has unacceptably ranked are some precious metals stocks plus IBM. In the latter, traders were blind-sided. It's a position we are, for now, forced to hold, rather than trade. We are now just over 50% long and down to 19 positions only. Today looks more positive for equities, commodities and possibly precious metals. I continue to believe that investors, not speculators, have a good opportunity at present to buy the precious metals -- both the bullion and the stocks.

Yesterday, Bill wrote that the President was boasting about devaluing the US Dollar during the debate as a way to make the US competitive in the global market place. This process has been going on in the majority of countries for years and is why gold has been trading like a currency and not a commodity - it just takes some talking heads a very long time to figure this out. Gold is going much, much higher due to this global process and each day there are additional large money managers figuring this out and getting on board the gold bull. The bull will end when the large money is offing precious metals and precious metal stocks to the public at much higher prices. We are nowhere near that time.

Recently, I have been writing about a short-term drop in price in order to reset sentiment and allow the price of gold to rise to new highs.

The following chart on Public Sentiment on Gold was updated on sentimentrader.com. I believe that it was done prior to yesterdays decline so I assume that public opinion moved even lower than is shown here:

That is what we were looking for, but it is not as low as I would like to have a real washout, but it is getting there.

If we get that decline in gold, we will see a final washout setting up the perfect launching pad directly in the timing band for a low. This will occur when the seasonal strong period is starting (end of October) due to the Indian wedding season. That would be an absolute gift!

Here is the Running Chart on Gold:

Here is the same chart drawn as a line chart for more clarity:

As you can see, price has moved very close to the projected area. Although we do not yet have the washout hoped for, one could make an argument to start to add to precious metals positions now - depending on your timeframe.

At the beginning of October, I posted the following chart showing 2 possible scenarios, one in blue, the other in green. It turns out that the higher probability one (green) has been working out. This chart is close enough for a partial buy, imo, but you must be ready to take some heat.

This simple chart of the HUI also looks constructive, I think its self explanatory:

Should near-term weakness in stocks and commodities occur, the Trade of the Generation will be hot once again. As money flees into bonds, they should be sold into that strength and gold should be bought.

Trade of Generation:

The bottom line is that we have entered the time to start to get long precious metal stocks. There are additional areas to add - either into weakness or if breakouts occur. I suspect more very short-term downside is in front of us, but you definitely do not want to be out of the market when the rally begins in earnest.