08/30/2012 - That Sell-off We've Been Warning You About ...

Today the Dow logged a 100+ point drop on the heels of a fed announcement tomorrow regarding more QE. Apparently, the news media folks think the market dropped because traders believe the fed will not announce more easing at tomorrow's meeting.

My response to this is: who cares? The signal so far is that we were going to experience an intermediate sell-off, (which I warned you about ....not twice ... but THREE times). I will admit, that some of my headlines leave something to be desired, but I think ignoring those (you should!), the data presented was clear: we are headed for a decline.

Now ... either we have already seen the sell-off (Bernanke will hint at QE and the HFT algos will start buying again once the news hits the wire), or we haven't seen the bottom yet (no mention of QE at all tomorrow ... so selling begets more selling ad-infinitum until the government is forced to step in).

How will we know which will be which?

Our clues will come from the closing prices of each index tomorrow (we get a double whammy of an update on the weekly charts + a regular closing).

1. If the Dow closes lower along with the transports, we'll be in sell-off mode. The fact that the dow failed to beat it's old high on the daily charts, but did beat it on the weekly charts tells us just how crazy the market is these days. Not to worry though! We knew this would come, and we know that we will quickly find our bearings. 
2. If the Dow closes lower but the transports close at an intermediate high, that will be a signal that the sell-off is going to hurt. 
3. If the Dow closes higher than 13000, regardless of what the transports do, then our main thesis remains in tact (buy this dip). 
4. Longer term, we are watching for whether the Dow confirms the bearish trend in the transportation index. If the Dow fails to confirm that trend (meaning, the Dow stays above 12,101.46 on the daily chart), the chances of a big move to the upside at some point will continue to mount.

Lastly, many newsletters have been dishing out free recommendations. If you are stuck on where to put your money, some quality gold and silver stocks which have been mentioned recently include Franco Nevada, Silver Wheaton and Sandstorm Gold. These companies should be considered core holdings for every precious metals investor, and even if you aren't a metals investor, these companies provide a stable, low risk way to diversify into precious metals through your RRSP, IRA or Investment Account. But please don't chase these stocks ... they can have spectacular run-ups, only to sell off to resistance levels quickly. Be patient, set limit orders at or near resistance levels, and buy in tranches if and when you can.

Unfortunately, gold and silver stocks are volatile and highly susceptible to irrational bouts of selling. But it's precisely the irrational selling that we can use in our favor to "buy low".

Full Disclosure: I have not been paid or given any incentives for mentioning any company in this article. I am long Silver Wheaton.