Honest Money Gold and Silver Report: Market Wrap
Week Ending 7/25/08
Unfortunately, last week's gold and silver report came to pass this week, as the precious metals closed down. Commodities continue their correction; some have dropped more than others - the last two to succumb being oil and gold.
Gold was down a little over 2.5%, while silver was down 4.0%. As last week's report suggested, the GDX was the weakest, closing down about 7.0%. Many have thrown in the towel and given up on the precious metal stocks. I have not.
This correction will establish a solid base for the next assault on the $1000 dollar price level, which will turn from resistance to support for the next stage up in the gold bull.
Last week's report showed the following chart and notes:
The daily chart below shows that price is approaching significant horizontal support that goes back to April. Will support hold or not is the $64 dollar question.
If support doesn't hold the gap at 92 will most likely get filled. A test of the 50 ma (89.49) would be standard procedure in a healthy bull market. Histograms are receding towards zero hinting that further downside action may be coming.
[Daily GLD Chart from last week's (July 18) report]
Compare the above with this week's (July 25) daily GLD chart below:
[Daily GLD Chart July 25]
Horizontal support near 94 was sliced through and the two gaps mentioned last week were filled as well. Now, there exists the gap from 88-90 that may want to be filled.
The histograms were hinting at further downside action this week, and as the chart shows, a negative crossover occurred with the histogram indicator falling and expanding into negative territory.
Last week's report said the following regarding silver:
The daily chart of SLV shows horizontal support has been broken below. The gap I mentioned in past reports has now been filled, which is good - it provides a more solid base from which to launch the next phase up.
The yellow shaded area represents a support zone. The bottom red horizontal line is significant. If price closes below on a sustained basis then the 50 ma will be tested and perhaps the gap between 165-170.
RSI is headed down and MACD appears about to make a negative cross over. Histograms are receding towards zero; all of which suggests further downside action.
Silver broke below both horizontal support and its 50 ma. There is another gap highlighted by the circle and arrow.
A good band of support runs from 16.50 - 17.00. It looks like the lows from earlier this year may be tested.
The gold stocks were hardest hit this past week, as last weekend's market wrap suggested. From the previous report:
The daily chart of the GDX shows a much more severe correction underway compared to physical gold and silver. Upper horizontal support was sliced through and price is testing both lower horizontal and diagonal support.
Notice the 50 ma is very near as well (46.29), as is the gap at 44 - 45. RSI shows negative divergence: when price made a new high from early July (50) to later in July near 52, RSI did not confirm and make a new high - it made a lower high.
MACD is pinching closer together and may be setting up for a negative cross over. Histograms are receding back towards zero, which suggests further downside. CMF is still positive but lower and warrants watching.
Unfortunately, the above came to pass this week, as the GDX was down almost 7%. Many gold bugs are frustrated and disappointed with the negative action in the gold and silver stocks. This is understandable - it is what bull markets do, they try to throw us off the back of the bull, so we are no longer riding it up.
All markets have to correct and consolidate, no matter how strong they are. If they do not correct, then there is a real problem, as they put themselves in jeopardy of crashing from lack of support beneath their highs.
A comparison of last week's daily GDX chart with this week's chart shows that horizontal support and the 50 ma were broken below, and that the gap at 44-45 was filled as well.
Last week's GDX chart (July 18)
The daily chart below shows the extent of this week's 7% fall. Many support levels were taken out to the downside. A test of the earlier spring lows may be in the cards.
The weekly chart shows what may be a head and shoulders formation. I have shown this chart several times in past reports. Until the neckline is broken it is not a confirmed formation. The CMF indicator shows serious distribution and selling. Buying pressure is drying up and selling pressure is building.
The neckline may or may not be breached, but it appears as if it is going to be tested. If a breach is made it will be important to see what kind of volume is present. A surge in volume on a break would suggest more downside action is coming.
However, we have had false breakouts in many precious metal stocks and the same can happen to the downside; in other words, even if the neckline is broken through, it doesn't guarantee that another big move down will occur. It could end up being a false reversal pattern that never gets confirmed.
There is a significant band of support from 37.50 - 42.50 that should provide a good base. For right now, and into the near future, physical gold and silver are safer than pm stocks.
Later this summer or fall should see the beginning of the next intermediate term move up in the precious metals. Patience is needed when trying to ride a Brahma bull; they don't take kindly to being tamed, especially by strangers.
Next up is the point & figure chart of the GDX. On Thursday, the 25th of July the bullish signal was reversed and a bearish price object of 36 is given. I do not think that this level will be reached, as it is at the very bottom of the yellow highlighted support zone in the chart above.
The point & figure chart for the GDX shows a bullish signal was reversed on July 24, 2008 (an example of how breakouts and breakdowns can quickly change) with a bearish downside prospective target of 36. This does not mean this is written in stone and will come to pass. Caveat Emptor, however.
Interest rates play a large role in today's paper fiat-debt system of money and finance. Rates have been given a false position of importance because the Federal Reserve constantly intervenes within the money & debt markets, which is not how free markets work; such is how fixed or contrived markets work.
This intervention is conducted by using interest rates, fractional reserve levels, legal tender laws, and a hodgepodge of other monetary potions and charms - all to bedazzle and guile. Keynesian propaganda has been forced fed to the actors and audience who now believe that a group of trolls can make the correct decisions on interest rate levels, as compared to the billions of actual buyers and sellers that make up the market: illusionary elitism of the highest degree.
As the financial Armageddon about us unfolds, more and more "old school" "truisms" and inter-market relationships will break down. Some will occur slowly, others quite fast. There has been much talk in the press concerning interest rates. Some say that interest rates will go up providing support for the dollar.
Some questions should be asked: is it possible for interest rates to go up and the dollar to still go down? If interest rates go up, what will happen to the bond market - will bonds go down? Can the housing and debt markets take any more mortal blows to the body?
When all is said and done, is it the dollar, stocks, or bonds that the wizards of finance covet the most - translated from on high in script?
There has not been much notice given to an interesting development in the markets. The Dow Utility Average appears to be forming a head & shoulders top. The weekly chart below shows this possible formation under construction.
As of now this is only a potential event, until the neckline is broke and confirmed by volume and follow through action, the formation remains corruptible and can change at any time. Notice that the utilities and the chart that follows of the 10 year yield seem to be whispering the same message.
Next up is the weekly chart of the 10 Year Treasury Note Yield. From July of 2007 until April of 2008, the ten year interest rate level has fallen from approximately 52 - 33 (-36%). That is a sizeable drop in a short amount of time. Do free markets in a sound monetary environment act like that?
Since April rates have risen from 33 to 43 (+10%). This means that players are still ahead +26% since July 2007, our friends from China and Japan being one example, given that they purchase over 40% of our debt. If rates break above horizontal resistance - the trend may be changing.
The dollar and gold move in opposite directions. Recently the dollar rallied and gold has been in a correction. The first chart shows the probable levels that the dollar could rally to. Presently, the dollar has recouped about half of its fall from June. There is a lot of overhead resistance above.
The dollar has just tested its 50 ma and closed just above. Follow through confirmation is now needed. Will the overhead resistance prove too much?
The following quote and chart are from last week's (7/18) report:
The weekly chart shows a serious negative divergence in the RSI indicator. When price moved from 575 to new highs above 600, RSI did not confirm and made a much lower high. This suggests there is more downside action to come.
MACD is about to make a negative cross over and the histograms are receding back to zero. The histograms also show a negative divergence. The 50 ma is it at 501.40 and it would not be unusual or out of keeping for it to be tested.
As this week's chart shows, the negative rsi divergence in last week's chart was enough to cause horizontal support to be broken below. Also, MACD did in fact make a negative crossover this week.
Up next is the P & F chart for the CCI Index. It shows a double bottom breakdown with a downside target of 490.00.
Presently, the index is at 542, so if this were to occur, it would be a drop of under 10% - a significant drop, but surely not the end of the powerful bull market to date. Stranger things have happened, however.
Commodity markets are correcting, of that there is no doubt. Oil and gold were the last to give in, but give in they have. As of now, their bull markets are intact, and they may shortly offer some good buying opportunities.
Later this fall, gold and silver and the other commodities should resume their bull market moves higher. From now until then accumulating a list of potential candidates for accumulation may be warranted. It is what I am doing in my own portfolio.
The chart below is one such possible candidate. HL is knocking on significant overhead resistance, which if broken above could prove to be quite bullish. During a week when most pm stocks were down, HL was up 4.45%.
Good luck. Good trading. Good health, and that's a wrap.
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