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Gold bugs get a break

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The major market indexes are relatively unchanged with the Dow Industrials (INDU) 9,015 -0.25% holding above the 9,000 level as we near the close, but still showing a 22-point decline, while the broader S&P 500 Index (SPX.X) 986.55 +0.03% trades fractionally green as does the tech-heavy NASDAQ-100 Index (NDX.X) 1,226 +0.1% with a 1-point gain.

I think "gold bugs" have their eyebrows lifted today as a favorable pattern unfolds for bulls that hints some sector bears may be starting to unravel some bearish trades in a head and shoulder top formation, which now looks to be negated with the Gold/Silver Index (XAU.X) 77.79 +3.58% building steam into the close. An old downward trend at 79.25 from the May 2002 highs of 89.11 now present the next bullish hurdle and most likely becomes the current risk assessment for bears that have gotten "trapped" in the failed head/shoulder top pattern.

There really seems to be some short-covering taking place from any type of consolidation pattern, and regardless of a stock lacking any type of fundamentals, the moves have been impressive.

A good example of a stock that severely lacks any type of fundamentals at this point is a speculative biotech stock we've discussed in our market commentary and profiled as bullish in past months. Today's upside alert was given in the OptionInvestor.com market monitor at as Geron Corp. (NASDAQ:GERN) $6.12 +19% broke above the $5.58 level of our WEEKLY R2 level and the rush was on as it looks to have triggered some bullish momentum traders, but more likely some shorts as the Biotechnology Index (BTK.X) 485.16 +4.5% continues a torrid climb to 52-week highs.

Geron Corporation Chart - Daily Interval

Here's a screen capture of GERN from earlier this afternoon. One bar chart pattern that really seems to be working for bulls right now is little consolidation patterns or wedges, which is similar to what a point and figure chartist that follows supply/demand looks for to further drive price action. Let's face it, bears have had it up to their earlobes with stocks that have broken higher continue the move. Even a stock like GERN, which at this stage of its various biotech discoveries lacks any type of fundamentals can find an unleashing of bullishness as demand suddenly outstrips supply after consolidation.

One thing I've been discussing as it relates to GERN, which I think any trader will come across from time to time, is a trader that just isn't performing like you thought it would. With these trades, a disciplined trader will quickly review the "facts" that got them interested in the trade to begin with, then measure those facts against what they are seeing in the MARKET.

Once a trader makes a decision that it is best to cut the trade from the account, the plan should be put in place and followed, and not changed from there.

Our GERN trade had a bull wondering if it not best to simply cut the trade from the account, as the stock just hadn't been participating with the sector action in the past couple of weeks.

One thing that I think traders should do when "feeling" this emotion (impatience) is to do something very similar to that discussed in last night's Index Trader wrap as it relates to levels.

Get at least 2 levels on your chart that represent finite points at which you will cut the trade from your account. When one of those levels is violated, then be disciplined and ready to take ACTION!

Now... what does a bull do, when suddenly, the trade begins to unfold? He/she second guesses things. Right? Right!

One way to not second guess a decision, is if/when the stock moves above your bullish level where you were willing to cut the trade, is to then snug up your stop at that level and let the STOCK tell you what to do. It's that simple and creates discipline for the trader.

Jeff Bailey

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