PAAS update: metals and miners at major, major decision point.

While I called a bottom in metals back in June, the chart action since then makes me cautious about the recent rally.  It could be part of a triangle.  The chart says that we will know the outcome very soon which is why I think we are at a major decision point.  I will use the PAAS chart as a proxy for metals and miners.  The last post on PAAS is here.

First, the bullish option.  Per the chart below, the double top that we are seeing now either just extends past the down sloping green line (thus killing the deadly declining double top formation).  That would be super bullish as it would remove most of the visible resistance points.  The other bullish option is that we get a small pull back to the lower green support line and then bounce up hard. That would indicate the presence of a 3rd wave and thus breakout confirmation would be at hand.  The momo players would begin to pile in with their leverage as they always do when turns are confirmed.

The bearish model is given below.  In this model, my fear of an ending diagonal for metals and miners plays out.  In this model, metals and miners go down with the broader markets; decoupling only occurs after the prices get beaten down in a deflationary collapse.  The bottom will be marked in this case by Yellen reversing the tapering and adding more stimulus, thus proving that the fed never did have any reasonable exit strategy.

The play here is simple.  If that upper green line can be broken next week then buy into it and set your stops below the green line.  If it is a true breakout then you are going to make big returns.  If it is a false breakout which subsequently then falls back down into the channel then it will have to happen quickly.  In this event you will only be exposed to a few percent loss given that you would be buying so close to the breakout.  The exposure should literally be 2-3% on the down side and easily 100% or more on the upside. 

For those of you paying very close attention, this strategy is not new.  It is in fact the strategy of a boring but successful poker player.  You know, the kind nobody else likes to play with because they whittle you away with their strategy.  They never take big gambles.  They never play a crappy hand hoping for the flush.   If they get a hand they don't like they fold quickly without engaging in a round of betting.  They lose their ante but survive to play again.

However there is a critically important difference here!!  In poker you cannot be in and out and in. You are in as long as you are playing.  You cannot sit out until the odds start looking good for you and then suddenly step in.  But you can do exactly that with stocks.  You can wait for the chart pattern to provide trigger points that are clearly actionable as explained above with PAAS.  You can wait for the setup before you step in.  You need not play every hand and indeed it is a winning strategy to only play when the odds greatly support your bet.