Gold, Silver and Miners Remain Junk Grade Investments

Tickers in this article: GDX
NEW YORK ( TheStreet) -- Since silver and gold topped in 2011 investors have been struggling with these positions hoping this cyclical bull market for metals continues. The simple truth is no one knows for sure if prices will continue and make new highs and those who say it's a for-sure thing we all know deep down is full of bull crap.

All investments move in cycles, waves or trends which ever you want to call it. The market has four simple yet distinct stages that each require a completely different skill set and trading tactics to navigate.

Stage 1 : After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.

Stage 2 : Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock's price.

Stage 3 : After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock's price.

Stage 4 : When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock's price. More times than not all of Stage 2 gains are given back in a short period of time. I show some of my trade setups using these exact stages free here.

Now that you know the stages and what it looks like it's time to review the gold, silver and miners charts.

Gold Chart -- Weekly

Gold has been in a bull market for several years but is starting to show its age in terms of the size of the price patterns, volume levels and extreme bullish sentiment. In 2011 a week before price topped we exited precious metals because the short term charts and volume levels were warning of a sharp drop. Since then I have not done many trades in either gold or silver because I do not like shorting in bull markets. Waiting for a bullish setup/price pattern before getting involved is my focus.

Gold has pulled back with a bullish five-wave correction the last five months and at key support. While the long term charts are pointing to higher gold prices you must be aware that if gold and silver start to breakdown things will likely get ugly quickly. To be honest I do not care which way it goes, I just want it to either rally from support here and make new highs or breakdown and crash. Both will be very profitable if traded properly.