GOLD and SILVER UPDATE (7;30 pm EST)
This is turning out to be a very wild week for precious metal investors. Switzerland's rejection of the "Save Our Swiss Gold" referendum last Sunday led to a final plunge in gold prices down to $1143 (prices had already been falling since Nov. 27 when polls were strongly suggesting a "no" vote on the referendum). So it was a bit of a surprise when gold soared back up on Monday with a 4.5% gain that pushed prices back over the $1200 mark. Apparently investors felt that the negative effect the of the vote was over and they were quick to jump back into both gold and silver. These unusually volatile price movements have generated a lot of mixed technical signals in gold and silver charts, and there now seems to be a lot of conflicting opinions from financial analysts on whether this market is still bearish or is now turning bullish. A case could be made for either side (which is why we are on the sidelines of this market right now after being stopped out of our short gold position yesterday). Let's take a look at both the bearish and bullish views to help determine our trading strategy moving forward.
The bullish view says that a long-term 3 year cycle bottom in gold is now in, and a multi-month rally towards $1300 (or possibly much higher) has begun. The fact that prices have broken above $1210 suggests that this is happening (although gold has not closed above that price yet). There is more resistance up to the $1250 area, and gold would have to break through $1220 and then $1250 soon to really be considered bullish. Monday's rally generated some strong bullish momentum signals in the charts of both gold and silver, so this bullish scenario may play out.
The bearish view says that gold prices will not get beyond resistance at $1250 (and maybe not even $1220 - $1235) and gold will resume its correction back down towards the $1000 area to complete the long-term cycle at new lows. Even though some bullish signals are now appearing in precious metal charts, overall directional momentum is mixed bullish and bearish (i.e. not 100% bullish) so the market can still turn down. In this bearish view, yesterday's price surge could be seen as an aberration likely triggered by investor reaction (or overreaction) to the Swiss referendum vote.
In terms of timing, it is a little too early for this market to be making a major reversal in directional trend. Such a reversal is more likely next week (or even the week after) so I am going to watch price movements into the end of this week before considering any trade directions. From the discussion above it is obvious that key resistance for gold is at $1220 - $1250. Key support would now be at Sunday's low of $1143. Silver has strong resistance in the $17 - $17.50 area with support at $14.50. These are the price areas to watch as we move into next week.
Another variable to watch in relation to gold prices is the U.S. Dollar Index. Directional momentum in the chart of this index is still nearly 100% bullish, and some technical patterns over the last month have been suggesting that the dollar's strong rally since August could break even higher. However, these patterns may be aborting now if this index can't exceed the 88.80 level soon. The dollar is also very overbought and overdue for some sort of correction. A breakout of the dollar now would favor the bearish scenario for gold and silver while a breakdown or correction in the dollar would favor the bullish view of the precious metals.
Currently on the sidelines of both gold and silver.
This is turning out to be a very wild week for precious metal investors. Switzerland's rejection of the "Save Our Swiss Gold" referendum last Sunday led to a final plunge in gold prices down to $1143 (prices had already been falling since Nov. 27 when polls were strongly suggesting a "no" vote on the referendum). So it was a bit of a surprise when gold soared back up on Monday with a 4.5% gain that pushed prices back over the $1200 mark. Apparently investors felt that the negative effect the of the vote was over and they were quick to jump back into both gold and silver. These unusually volatile price movements have generated a lot of mixed technical signals in gold and silver charts, and there now seems to be a lot of conflicting opinions from financial analysts on whether this market is still bearish or is now turning bullish. A case could be made for either side (which is why we are on the sidelines of this market right now after being stopped out of our short gold position yesterday). Let's take a look at both the bearish and bullish views to help determine our trading strategy moving forward.
The bullish view says that a long-term 3 year cycle bottom in gold is now in, and a multi-month rally towards $1300 (or possibly much higher) has begun. The fact that prices have broken above $1210 suggests that this is happening (although gold has not closed above that price yet). There is more resistance up to the $1250 area, and gold would have to break through $1220 and then $1250 soon to really be considered bullish. Monday's rally generated some strong bullish momentum signals in the charts of both gold and silver, so this bullish scenario may play out.
The bearish view says that gold prices will not get beyond resistance at $1250 (and maybe not even $1220 - $1235) and gold will resume its correction back down towards the $1000 area to complete the long-term cycle at new lows. Even though some bullish signals are now appearing in precious metal charts, overall directional momentum is mixed bullish and bearish (i.e. not 100% bullish) so the market can still turn down. In this bearish view, yesterday's price surge could be seen as an aberration likely triggered by investor reaction (or overreaction) to the Swiss referendum vote.
In terms of timing, it is a little too early for this market to be making a major reversal in directional trend. Such a reversal is more likely next week (or even the week after) so I am going to watch price movements into the end of this week before considering any trade directions. From the discussion above it is obvious that key resistance for gold is at $1220 - $1250. Key support would now be at Sunday's low of $1143. Silver has strong resistance in the $17 - $17.50 area with support at $14.50. These are the price areas to watch as we move into next week.
Another variable to watch in relation to gold prices is the U.S. Dollar Index. Directional momentum in the chart of this index is still nearly 100% bullish, and some technical patterns over the last month have been suggesting that the dollar's strong rally since August could break even higher. However, these patterns may be aborting now if this index can't exceed the 88.80 level soon. The dollar is also very overbought and overdue for some sort of correction. A breakout of the dollar now would favor the bearish scenario for gold and silver while a breakdown or correction in the dollar would favor the bullish view of the precious metals.
Currently on the sidelines of both gold and silver.
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