Are Precious Metals Ready to Break Out?

By Raghu Gullapalli


Over the past eight days, the market is up 7% and seems ready for a pullback, especially on the news of poor non-farm payrolls. But one element of the market that seems to be gathering momentum right now is the precious metal segment, namely gold and silver.

Silver -- which, in the humble opinion of this trader, was being accumulated -- looks ready to break out above the $5 dollar range it's been bound to over the past two months.


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iShares Silver Trust (SLV), the exchange-traded fund, is approaching the reentry level set bySmartStops, at $36.71. This may prove to be a great setup in terms of risk reward, as short-term stop on SLV is $34.34 and the long-fterm stop is $33.79. The upside on this trade is substantial, as SLV may well seek out the highs from late April in the days to come. Part of my bullish bias on this trade comes from the fact that during this eight-week period of accumulation the ETF never dropped below its 210-day moving average.


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Gold, on the other hand, has been testing the $1550 level, and now it seems like the perfect storm of variables are brewing to push the metal through this level and possibly even to the $1600 year-end price target set by many market technicians and gurus.


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The depressing US jobs number, the downgrade of Portugal, and the increasing fears of a default by one of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) are the catalysts for this new drive up. The rest of Europe and their myriad of financial institutions have tremendous exposure to these countries' debt, and a single default by one of these countries could set off a domino effect. This would make Lehman’s collapse look like a tempest in a teapot. And in the midst of any storm, people flock to anchors to keep them secure. In these tumultuous markets that anchor is gold, and by proxy, silver.

SPDR Gold Trust (GLD) just like SLV has held strongly above its 210-day moving average and is also offering a good risk to reward trade. SmartStops has the short-term and long-term stops at $146.64 and $145.75 with a reentry into GLD at $151.86


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Investors Beware: 4 Chinese Companies of Questionable Value

This past Sunday I watched the premier of HBO’s Too Big to Fail, the story of the collapse of Lehman Brothers and the subsequent bailout of AIG (AIG) and the creation of the Troubled Asset Relief Program (TARP).

While most of the movie seemed like a rather simplified version of events, one thing did resonate with me: the inability of many financial professionals to realize the true value of the “assets” in their portfolios. If the likes of Dick Fuld, with all his acumen and resources, lacked the perspective to realize he was standing on a pile of garbage, what chance is there the normal, everyday investor would correctly assess his or her own portfolio?

To that end, let’s play devil's advocate and take a look at some equities of questionable value.

On April 26 and 27 of this year, Longtop Financial Technologies (LFT) dropped nearly 50% following a report of fraudulent financial statements from Citron Research. How could the average investor have protected himself or herself better, you ask? Simple: Appropriate riskmanagement. By always having an eye on the risk, investors could have protected profits and at the very least prevented the eventual outcome -- possibly losing 100% of their investment when the stock was halted last week.

If the fundamentals of a company are flawed or outright fraud, how is it possible to assess the true worth of a company? All you can do is mitigate your risk and make sure you have the right shoes on when you wade through those “muddy” waters.

AsiaInfo-Linkage (ASIA) is one of the plethora of Chinese software companies that have come seeking investors in US markets, for example. The stock began to really plummet toward the beginning of April when accusations of fraud began to circulate and then cut through the 210-day moving average with conviction. After a brief bounce back to the 210, it has continued its dive and may seek the low single digits from whence it came. Smartstops has the short-term stop at $16.68 and the long-term stop a scant $0.40 away at $16.21. In the unlikely event the stock reverses course, our reentry price is $20.49.

Another company to beware of is VanceInfo (VIT). Oppenheimer beat me to the punch when they downgraded it this morning. According to Oppenheimer, “The firm downgraded the stock because it has limited confidence in financial statements for Chinese IT services companies that have been audited by Deloitte, after the SEC launched an inquiry into Longtop Financial.” VIT, too, looks to return single digits if not to zero as it follows its current trajectory. It is close to 10 points below the 210-day moving average. Smartstops has the short-term stop at $20.56 and the long-term stop is $18.65

Another company that may be attractive for would-be Chinese real estate investors is E-House Holdings Limited (EJ). For those of you who think they know better than Jim Chanos, think again. If this stock is a leading indicator of a Chinese real estate bubble, the world is in for some rocky times ahead. The stock is trading below its 55- and 210-day moving averages. Some part of this phenomenon is related to the Chinese government's desire to reduce speculation in the market. Smartstops has the short-term stop at $9.85 and the long-term stop is at $9.59

It may be tempting to stay in these companies if you own their stock, or even enter here if you feel like rolling the dice. But remember the lessons of 2008; the speculators at Lehman Brothers, Bear Stearns, and AIG brought down those venerable names by ignoring risk management.

Rarely is the juice worth the squeeze.

Editor's Note: This content was originally posted on SmartStops.net.

The Bubble Has Popped -- Now What?

A rare halt in oil trading Wednesday triggered a sharp selloff in commodities and equities in markets afraid of an encore of last week’s commodity plunge. The last halt in oil trading occurred in September 2008, a week after the collapse of Lehman Brothers.

Sliver lost 9% in the selloff, erasing gains in the previous couple days and was down another 6% as of this writing. It has yet to find a bottom -- or as Bob Barker of "The Price is Right" might say, “Down, down it goes -- where it stops no one knows.”

Now with the increased margin requirements driving a number of speculators out of the market, the precious metal may seek out price levels more in keeping with historical norms. Those prices are calculated by seeing how many ounces of silver are needed to buy an ounce of gold. Over the past 10 years the ratio has been roughly 60:1. If silver were to return to a similar ratio, it could go down as far as $25 an ounce. iShares Silver Trust(SLV), the proxy we use in lieu of silver at Smartstops.net, has the short-term stop at $31.97 and the long-term stop at $29.37.

If that wasn’t enough to make you reconsider being long commodities, the Powershares DB Commodity Index Tracking ETF (DBC) has formed a head-and-shoulders. A pattern associated with a change in trend direction. The neckline/support of the pattern coincides with the Smartstops.net short-term stop at $28.16 and the long-term stop at $27.30.

SmartStops provides effective, easy-to-implement risk monitoring for investment professionals and individual investors to optimize profits and minimize losses.