Friday Update...

I am just sending out a very brief Friday update, as I am in the process of getting ready to fly back to Canada from Mexico this weekend. After an explosive week in the markets last week, this week turned out to be one of very little action and a lot of waiting for things to unfold. Gold was mostly range-bound for the week, while silver continued higher and then finally dropped a little bit yesterday and today. The result was that gold stocks on our watch list pulled back somewhat while silver stocks really did not. The remainder of our watch-list mostly continued to grind higher, while a few stocks broke down. As long as stops were honoured, very little damage was done.

In terms of the general markets, The TSX went sideways for the week, while US markets powered higher to new highs on some earning beats (on extremely lowered expectations), rumours of renewed trade talks between the US and China, and optimism that the Federal reserve will start cutting interest rates following next week's two-day meeting. The consensus is that the Fed will lower rates by 25 basis points next week with some analysts predicting a 50 basis point reduction. There are very few economists who think that there will not be a rate cut. The case for no rate cut is that stock markets are at all-time highs and employment numbers are strong.

Personally, I think we will see a 25 basis point cut and I believe the market has largely priced that in already. If we were to get a 50 basis point cut, I think the markets would probably explode higher, at least initially. No cut would likely cause a sell-off because this is the least expected option and it would also be a sign that the Fed may not be as accommodating in supporting the markets moving forward as investors believe. Regardless of the outcome, I expect some fireworks in both the general markets and also in the precious metals space.

In light of this expected volatility, we need to be prepared for a variety of different outcomes and have a plan for each. Since the price of gold and silver have not really corrected yet and are still overbought, I think we should expect things to drift lower with perhaps a quick flush (to 1400 or even 1380 for gold) that will scare many traders out of their positions before or after the interest rate decision is announced on July 31st. Another option would be for mining stocks to just drift sideways into the meeting and then take off once the rate decision is announced. Regardless of the outcome, the idea here is not to try and predict how the market will react, but rather have a plan for whatever does happen. If you are holding a lot of open positions, you could consider lightening up in advance of the meeting. You can then respond to the market reaction once it occurs. There will always be another trade and if you have made good money these past two weeks, there is nothing wrong with locking in some of those gains.

Personally, I have sold most of my overbought positions but I am still holding many positions that have not yet taken off. I will honour my stops on those positions but I will also be prepared to buy positions back again on a reversal upwards. As an example, I have illustrated below how things could unfold for one of the stronger silver stocks.

EDV has been really strong and is basically in a bull flag pattern at present. If we were to have a flush in gold and silver, I could see this breaking down out of the flag pattern, which would cause a lot of traders to sell their positions. Once traders have sold their positions, it could then reverse upwards and leave them behind. When I see a flush like this occurring, I often wait to see how it plays out during the day because they often do reverse higher. I also make sure that my position size is small enough that I can comfortably watch things unfold, knowing that it could keep going down and I will have to sell it lower and wait for an eventual reversal. It really is a matter of doing what makes you feel comfortable and unemotional. A second option could see EDV's bull flag drift sideways until the rate announcement is made and then blast higher afterwards.

There are many charts similar to this one and the point is that there are numerous ways for this to unfold, including a drop in the days leading up to the decision followed by a reversal upwards, or further price increases leading up to the decision followed by a drop. So again, have a plan and stick to it. Stop losses are there for a reason but we have some flexibility in the strategies that we decide to implement. Some will want to lock in all gains, avoid all the Fed nonsense and wait patiently for another opportunity. Others will be okay with holding positions and selling if stop losses are hit and then re-buying or rotating into other stocks on a potential rebound. The bottom line is that we should expect volatility before and/or after the announcement and know how we plan to deal with it.

I should note that I will be in Canada for the next five weeks visiting family and moving around a lot. Watch-lists will still be updated but reports may be abbreviated during that time. Feel free to email me with any specific questions or concerns that you may have.

Have a great weekend!