When Oscillators Give False Signals

10/05/2010 12:01 am EST

Focus: STRATEGIES

Most people have a lot of trouble buying anything when it's in an overbought condition (they have trouble buying when it's oversold too). Unfortunately, virtually every breakout occurs from overbought levels. This is especially true during a powerful C-wave advance.

Take a look at the last two C-waves and the first leg up in the current C-wave.

chart
Click to Enlarge

You can see that each one of these powerful rallies when it broke out of the trading range had already reached overbought levels. Then it stayed overbought for most of the rest of the rally.
 
If you didn't buy the breakout, you missed a huge portion of the C-wave as no corrective move retraced back to the breakout point.
 
One of the biggest mistakes investors and traders make is using oscillators after a breakout has occurred. Oscillators are great tools if an asset is in a trading range. Once that trading range gets broken, though, one has to throw out their oscillators because they will cause you to miss huge portions of the move, if not all of it.
 
Now let me remind everyone that Bernanke clearly stated he would print money if the economy didn't improve. We know there is no way the economy can improve because we still don't have the next "new" industry to drive job creation.
 
Folks, this one is a no brainer. The Fed is going to print. That is going to cause asset inflation. The dollar is going to drop down into a yearly and three-year cycle low. And the market is going to make Bernanke pay for his insane monetary policy with at least a mini-currency crisis in the dollar by next spring. And ultimately, it is going to cause general inflation in all prices with the possible exception of real estate.
 
Gold is likely now in a runaway move higher. Smart money is using any and all pullbacks to get in ahead of the inflationary storm that's coming. We saw it in the action yesterday. Gold briefly traded down to the $1300 level and miners briefly tagged 500. Buying pressure immediately came in at those levels.

chart
Click to Enlarge

chart
Click to Enlarge

I think there is a very strong possibility that the miners are never going to see sub-500 again for the duration of this bull market. And even if they do, it will be only briefly. As a matter of fact, the miners are on the cusp of a historic event that I have been discussing at length in the last several premium updates.

By Toby Connor of GoldScents.blogspot.com

Related Articles on STRATEGIES