Gold Market Update

Gold did embark on a new intermediate uptrend as predicted in the last Gold Market update posted towards the end of April, however, the uptrend was not as strong as expected and it failed to break out to new dollar highs and is now starting to weaken again without mounting a serious challenge of the highs first. This is bearish for the short to medium-term.

On the 6-month chart we can see the modest uptrend in force from the start of May and how it took the price up towards $1,000 again, resulting in a gain of about $100. Last week it showed signs of serious technical deterioration as it buckled beneath the resistance approaching $1,000. This was hardly surprising given that the oversold dollar bounced strongly from important support, a reversal that projects a dollar rally to higher levels. So far gold's intermediate uptrend has not been violated, but the double "bearish engulfing pattern " that showed up on the chart during last week does suggest that a breakdown is pending, that will be followed by a significant reaction, although the fast neutralizing RSI indicator does suggest that this breakdown will probably be preceded by a brief bounce early this week. How far will a reaction carry? - it is expected to take gold back towards, but not necessarily right down to the support zone shown on the chart in the $880 area.

Despite the prospect of an immediate reaction the longer-term picture for gold looks positive. On the 2-year chart we can see that a high level Head-and-Shoulders top appears to be approaching completion, beneath a neckline at the resistance level approaching the highs. If this interpretation is correct then after the anticipated reactive phase is complete gold should turn up again and break out to new highs. Traders should note that the support and resistance levels shown are very important - failure of the support will be bearish and be viewed as a sell signal. On the other hand, a breakout above the resistance to new highs should lead to a sustained and substantial uptrend.

Since it is the reversal in the dollar that put the Precious Metals sector under such pressure last week, it is worth taking a quick look at the dollar chart. On the 6-month chart for the dollar index we can see that by early last week it had arrived in an important support zone in a severely oversold condition, which is an important factor that led us to thin our positions in the sector . The magnitude of the rebound, with 2 large white candlestocks appearing, is a signal that the dollar is probably making an intermediate reversal and therefore should enter a recovery uptrend in coming weeks that will put further pressure on the Precious Metals sector. How far might the dollar rally? At this point the 83 area looks like a reasonable target.

Silver has behaved pretty much as forecast in the last update posted late in April, entering into a fairly vigorous uptrend that has taken it up to our minimum target at the strong resistance at and above $16. It even paused and reacted at the $14.30 area as predicted. Last week, however, it showed signs of serious technical deterioration, so that even though it is still just within the uptrend, it is thought likely that it will soon break down into a reactive phase, and as silver has a habit of going down one helluva lot faster than it goes up, experienced traders will know what that means.

On the 6-month chart you can see why we started to get out of our silver and silver stock positions early last week and continued unloading them through the middle of the week. For silver arrived at the zone of important resistance shown in a critically overbought condition, as shown by the RSI indicator at the top of the chart. With the week's trading over we can see an ugly double "bearish engulfing pattern" on the chart, which is also evident on the gold chart. This pattern points to an imminent breakdown and sharp retreat, although with the RSI now fast neutralising, we might see a brief rally first very early this coming week. The still substantially overbought MACD indicator at the bottom of the chart and the rather large gap with the moving averages show there is plenty for a room for a significant reaction here. A big reason for this expected reaction will be a continuation of the dollar recovery that began last week, which we considered in the Gold Market update, to which you are referred for details.

The 2-year chart for silver is interesting as it shows the origin of the quite strong resistance at and above $16, which we can trace back to the large quantity of trading that occurred at and above the $16 level between about January and July of last year. Earlier buyers "hung up" in this top pattern are taking the opportunity to "get out even" once the price gets up near to where they bought, hence the resistance. The 2-year chart also gives us some further clues as to where the expected reaction is likely to terminate. The vicinity of the rising 50-day moving average is frequently a place where reactions end, and here we can see that not far beneath this average we have a longer-term uptrend line of some significance which started from the lows of last Fall. So it looks likely that the reaction from the steeper uptrend shown on the 6-month chart will end in the vicinity of the 50-day moving average, and at or above the uptrend line. While a breach of this uptrend line would certainly not be a positive development, a break below the support at the April lows in the $11.80 area would be regarded as a more bearish development. However, we will be looking for evidence of basing action at or above the uptrend line dating back to last October.

Clive Maund, Diploma Technical Analysis
[email protected]
www.clivemaund.com

Copiapo, Chile, 7 June 2009