Gold Market Update

Gold broke down and went into decline, as predicted in the last update posted early this month. At that time our maximum downside target was the strong support in the $880 area, but now there are strong signs that the decline has either run its course, or is close to having done so, and that a breakout to new highs may be close at hand.

On the 6-month chart we can see how the double bearish engulfing pattern at the highs led to gold going into retreat as expected, within a tightly defined downtrend. Although price action shows little sign of the downtrend ending, we can observe several strongly bullish influences that could lead to its ending anytime soon. One is the proximity of the rising 50-day moving average, while another is the bullish alignment of both moving averages, the 50 and 200-day. In addition the price has dropped back into a zone of support, and finally short-term oscillators have neutralized as a result of the reaction, renewing upside potential. Although helpful inasmuch as it enables us to examine recent action in detail, the 6-month chart is useless when it comes to divining the major trend and determining gold's next big move. To do that we need to refer to longer-term charts.

The longer-term 3-year chart provides us with more of a roadmap showing where gold is relative to its major cycles, enabling us to figure where it is probably headed next. Superficially the pattern that appears on this chart looks like a major top area forming beneath the strong resistance approaching last year's highs, but if we look closer we can see that a bullish high level Head-and-Shoulders bottom has formed beneath the resistance which forms the neckline of the pattern. This formation is remarkably symmetrical and if the symmetry continues gold will complete the pattern shortly by blasting out of the top of it to new highs. If this interpretation is correct then clearly we at a good point here after the recent reaction to accumulate or build positions in gold and gold stocks.

While the dollar rebound of recent weeks was predicted in advance, which was a factor leading us to take profits in PM stocks at the start of the month on www.clivemaund.com, there has not been as much follow through by the dollar as we had expected, and now the dollar is looking increasingly vulnerable to another downleg that could be severe. On the 1-year chart for the dollar index we can see how it has temporarily stabilised above the support level shown, allowing its oversold condition to unwind, but it has, thus far at least, failed to make much headway and with the falling 50-day moving average coming into play and starting to pressure it from above, it is looking increasingly vulnerable to breaking lower again to commence another downleg. If the current small trading range is a bear Pennant, which is what it now looks like, then the downside target for the next downleg is the 72 area. It should be obvious that if such a move transpires, gold is likely to break out to new highs and will probably advance to the $1080 area, which could happen quickly.

Finally the huge upside volume in big silver stocks on Friday is a circumstantial factor that also suggests an imminent end to the downtrend in both silver and gold.

We are believed to be at a good entry point for silver here as the overall pattern is strongly bullish, and the predicted reaction of the past few weeks, which has served to unwind the earlier overbought condition, is now thought to have run its course.

On the 1-year chart we can see that after breaking out of the strongly bullish fine Cup & Handle pattern, silver made a fairly rapid run at the important resistance level in the $16.00 - $16.80 zone, arriving there in a critically overbought condition, as shown by the RSI indicator at the top of the chart, so it is hardly surprising that it has reacted back over the past several weeks. We anticipated this reaction and sidestepped it , which is just as well as we can now buy back both silver and big silver stocks, some of which are about 25% cheaper after the reaction. In the last update the reaction was expected to terminate in the vicinity of the 50-day moving average, which silver is close to now, or at a trendline drawn from the October lows, which is not shown on this chart as it creates too much clutter, but was shown on a 2-year chart in the last update. This trendline is now at about $13.50. However, on Friday the big silvers rose on huge volume - record volume in the case of some of them - and this is believed to be evidence of Smart Money piling in ahead of a new uptrend. For this reason the downtrend in silver is thought to have ended and it is rated an immediate buy, even and especially if it dips early next week. Note that the uptrend channel drawn from the early May low is still provisional and may require adjustment depending on whether we have already arrived at the final low.

The long-term arithmetic chart for silver going back to the start of the bullmarket is interesting as it shows that two very long-term trendlines gave targets for the blowoff top early last year and also the crash low point that followed late in the year. Observe also how silver bottomed late last year just above a zone of important support dating back to the extensive trading in the long 2004 - 2005 trading range. Finally the red downtrend line shown was a tool used in the last update to call the recent top. This downtrend line should be overcome by the next upleg.

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

Copiapo, Chile, 21 June 2009