The precious metals market is currently proving itself to be quite challenging to trade. There are still both bullish and bearish factors influencing gold and silver.
Silver has broken below its low from Oct. 6 and gold is testing its Oct. 6 low now (bullish divergence). This suggests that both metals are now falling into the end and bottom of an older medium-term cycle (i.e they did not start new cycles on Oct. 6). Because we are now in a reversal zone for these metals, and we have a bullish divergence signal (until gold falls below its Oct. 6 low of $1262), and it is late in these cycles and a bottom is due, we entered a long position in gold on Monday.
Despite the bullish factors just mentioned, there are some new bearish developments to consider now. Directional momentum in gold just turned 100% bearish (it had been mixed bullish and bearish). This makes both gold and silver 100% bearish for now. While it wouldn't be unusual to see strong bearish momentum at the bottom of a cycle just before it turns up, this could also indicate that a further breakdown in prices is imminent. Gold and silver mining company stocks are also looking quite bearish over the last day or two. Finally, a review of recent COT (Commitment of Traders) charts for gold and silver shows them still strongly bearish.
Is it possible for these metals to rally from here? Yes, but since today is the last day of this reversal zone (it might extend into tomorrow), it is also possible for prices to break down and fall further into the next reversal zone in the last week of December (with gold possibly reaching the $1200 area). Key support for gold right now is at $1260. We don't want to see prices close below there, especially after Thursday. Silver now has support down to $15.50 so we don't want to see that level breached either. Traders who are alarmed by the bearish factors just mentioned may wish to sell their gold long positions now with little loss, but I am going to maintain my long position in gold with an automatic stop loss to be triggered on a move below $1255.
The U.S. Dollar Index may have made a significant bottom on Dec. 1 (in the current reversal zone) at 92.60 and is now rallying. This is, of course, supporting the bearish view of gold and silver discussed above, but directional momentum in the dollar is nearly 100% bearish, and the overall chart for the dollar is not looking very good so this rally may not get very far before turning down again. A dollar rally into the end of December might correspond to a new bottom in the precious metals around the same time as I discussed above.
It looks like we may have called the top of the rally in the broad stock market on Monday, but this correction still has to follow through some more to make our short position worthwhile. Since today is the last day of the current reversal zone for equities, there is a good chance the top is in and prices could continue to fall at least into late next week. We can now set a stop loss for our short position based on all three market indices (DOW, S&P 500, NASDAQ) making new highs. Holding my short position in the broad stock market.
It looks like crude oil is not going to give us a new high in the current reversal zone (which ends today) as prices have been dropping sharply this week. Unless crude turns on a dime here and rallies back up, it is likely that the Nov. 27 high at $58.99 was the cycle high and prices will now correct down to the cycle bottom over the next several weeks. Because we did not get a secondary high to sell short, we will probably just wait to buy the cycle bottom somewhere below $55. Out of crude oil for now.