Maund on Gold, Silver HUI & US$
The action on Friday was characteristic of a reversal and it was sector wide with Reversal Days showing up in the charts of the gold stock indices and many gold and silver stocks. The action in the metals themselves was less convincing, with silver looking like it had bottomed, at least for now, but gold itself looks rather ambiguous.
Even before they started to head south in earnest, Precious Metals stocks were seriously underperforming gold and silver, and as soon as the metals broke down, stocks caved in. The flip side of this relationship is that we can expect PM stocks to hit bottom ahead of the metals, and, when the time comes, we should be on the lookout for this as a great buying opportunity. On a trading basis we appear to be at a buy spot now, and some of the stronger stocks may not drop below the current lows. We should remain aware that while the metals are likely to drop to lower levels after a near-term bounce, stocks may not drop below current levels, or if they do, not by much.
Many observers believe that the correction is now over, which is understandable given the severity of the drop in little more than a week, but this is not believed to be the case, at least for the metals, for reasons we will now look at, so if we see an impressive rally over the next week or two, as expected, we should not be deceived.
On the 6-month chart for gold, we can see 2 very large down days over the past week. Single day falls of this magnitude, occurring as they have immediately after gold being technically stretched to the limit in terms of being overbought, have measuring implications. There is no "formula" for this, as if there was everybody would be on to it and the market would simply mutate to render the formula obsolete, as the majority can never be permitted to be correct, except for a short period of time - usually just long enough to trap them. Nevertheless, it is possible on the basis of experience to make a subjective projection as to the magnitude of the correction that these large down days project, especially when considered in conjunction with the magnitude of the parallel down days in the stock indices and individual large gold stocks, and the volume accompanying the drops in individual large gold stocks. The steep drop in Goldcorp on colossal volume as the correction started, and the similar but less dramatic action in other large golds, was highlighted in the last Gold Market update as a bearish omen for the medium-term (meaning about 4 to 10 weeks), even if the action late last week signals a short-term rally.
Taking all of this into account it would appear that we are in for a correction in gold that will take it back into the zone of strong support shown on the chart, in the $550 - $575 area, and it would not be unusual for the correction to take the price back to the vicinity of its 200-day moving average, although, as the correction is expected to occur over a 4 to 8 week timeframe, the 200-day moving average would likely be approaching the $550 area by the time the price returned to meet it. A parallel correction is expected in silver that is expected to result in it breaking the support level in the $12 area, and retreating back to the next strong support level approaching $10.
Given the foregoing, the correct strategy for traders is believed to be to buy the current market, metals and especially stocks, but then to sell once the expected short-term rally has run its course, and simultaneously move to protect any outstanding long positions with selected Put options, and more aggressive traders may attempt to capitalize on the expected reaction in the metals and stocks by means of Puts. Metals and stocks are then expected to dip, with gold and silver dropping below last weeks lows to the levels detailed above, although stocks are not expected to drop much below last weeks' lows, and the stronger ones may not react as far as last weeks' lows. Note that any stock Put option positions opened after the upcoming short-term rally should be liquidated as the metals APPROACH their expected targets, as stocks are expected to turn up again before the metals hit bottom.
Let's now turn our attention to the anticipated short-term bounce, and the reasons for it. On the gold chart we can see that gold has fallen to arrive at a point a little above a support level, and on the MACD histogram at the bottom of the chart, we can also see that it is quite heavily oversold on a short-term basis. On the silver chart, however, the reasons for a short-term bounce are much more compelling. Silver has dropped back close to the strong support level that arrested the plunge in April, which is now bolstered by the presence of the rising 50-day moving average, and it is showing a short-term extreme oversold condition on its RSI indicator and MACD histogram. In addition, Friday's price action was bullish, with the price probing strong support intraday and closing well off the lows. How far might the expected bounce get? - the $14 area looks likely and it may return to approach the highs again, although it is then expected to go into retreat once more.
The HUI index chart strongly suggests a substantial bounce here. We have just seen a severe drop, with the index down for 7 straight days. This drop has created an extremely oversold condition, made very clear by the RSI and MACD indicator and MACD histogram. Again, even though the index closed slightly down on the day on Friday, intraday price action was bullish, with the index dropping steeply intraday to probe support, only to close near the day's high. The conclusion from all of this is that a significant, and tradable short-term rally is on the cards. How does this fit with the anticipated intermediate uptrend in the dollar? The expected uptrend in the dollar is a medium-term scenario - short-term it will probably return to test the support in the 83.50 area that arrested the recent steep decline.
Like buxom ladies pressing grapes with their bare feet, the doom and gloomers were jumping up and down on the dollar just over a week ago - and lo and behold, it is starting to rally. An intermediate uptrend in the dollar is believed to be beginning that can be expected to synchronize with an ongoing Precious Metals correction, although it is considered likely that the dollar will retest recent lows over the next week or two as the Precious Metals rally.
The short-term bullish appearance of the silver chart is given added weight by the action of many small silver stocks on Friday, and we will now examine some of these stocks in detail, and also look at the charts for Goldcorp and Glamis Gold as barometers for the large golds - what they reveal is dramatic.
Clive Maund, Diploma Technical Analysis
Copiapo in Chile, 21 May 2006