Corrections Not Crashes
"Nonsense is good only because common sense is so limited." -- George Santayana 1863-1952, American Philosopher, Poet
The main up trend line currently ends around the 5900-6000 ranges. If we pulled back here all the pundits would scream that the world had come to an end and the markets had crashed. If we held at this zone, this could be viewed as nothing but a pull back to the long-term up trend line. At this point it would make pretty good sense to take new long positions while the masses carried on shorting. Here is another small clue you can use 10 year then 20 year, 30 year charts etc; draw the main trend lines in each of them. 90% of the time there will be some sort of strong reversal when those long term trend lines are hit; whether they will hold forever is another story.
When one is broken that means the next long term trend line will be the support zone for the next rally. Example say the 10 year long term up trend line is hit then 90% of the time some sort of powerful reversal will take place (look at chart below). Later on the 10 year up trend line might be violated (but you could get out by drawing in the new shorter term up trend line in and once broken just sit it out or short the markets) so the 20 year long term up trend line now becomes the support zone. So when the market get to this point and hold (as stated before); 90% of the time it will rally very strongly and one could open up long positions to benefit from this move.
Applying the above principles, a correction to the 8000 level will most likely (90% chance) trigger a strong counter rally. This does not mean that a new bull has begun; it could just simply be a powerful bear rally. The point is that you could make some pretty decent gains if you applied the simple rules of trend analysis. You could then draw in the short term trend lines (only the long term ones have been drawn in, up and down) to determine the right time to bail out. If the 8000 mark were later penetrated you would go to the first graph, which now has 20 years worth of data, and wait for the long term up trend line to be hit before attempting to initiate new longs. In the interim you could short the market.
All markets go through the same phase; after gold Peaked in the 1970's it did not just plunge down, it experienced several strong rallies in between. If one used simple trend analysis one would have been able to make quiet a bit of money each time gold mounted a rather strong rally after it topped in 1980. The individuals who arrive at the party late are the first ones to come out and mistake a correction for a crash. For example with Gold those that got in from 2001 to late 2002 would not feel or think that the market had crashed if Gold were to correct all the way to 380; those that took positions in Dec 2004 would be very quick to jump and screaming Crash.
Corrections only appear to be crashes to those who took positions when they should have been selling or sitting and waiting patiently for a pull back. If you look at history, it's the smart investors who have taken positions when a new trend has just begun that end up making the biggest kills. Along the way additional positions can be taken if on a pull back the main up trend line is held.
Lets wrap this subject up with this last thought. The commodities bull (remember commodities are not just Gold and Silver) has just barely begun and has a long way to go before anyone can even begin entertaining the thought of a crash. However if you examine this bull via stronger currencies (which we have done so in several articles over the last 2 years), one notices that Gold has not rallied in every major currency; the explosive stage (hyper bull) is yet to come.
"Normality highly values its normal man. It educates children to lose themselves and to become absurd, and thus to be normal. Normal men have killed perhaps 100, 000 of their fellow normal men in the last fifty years." -- R. D. Laing 1927-1989, British Psychiatrist