The Long and Short of Metals and Oil

By: John Winston | Sun, Jan 31, 2010
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In my December 11th article "A Seasonal Look at Gold and Oil" the gold correction was just beginning its second week. At that time I speculated on where gold would pullback to as far as price goes and said:

Gold has now reached a timeframe where a December pullback is in effect. If things play out a temporary bottom should be seen in mid December or early January and another gold leg up would develop into the early winter....... the 1075-1125 area ....offers a potential opportunity.

The chart below shows just how important the 1075 area turned out to be. Look at the price of last two lows on the chart.

Since that December 11th update gold bottomed right at the 1075 area. In early January (the first trading day) the price of gold opened under 1100 and another rally leg of 93 dollars from bottom to top price developed into mid January. But since that time gold and just about all other markets have a begun a severe short term decline. The one market of course that is rallying is the US Dollar. When you look at a seasonal chart of the dollar BEFORE the turn of the century it looked like this below. We can see the lows are made in the October thru December time frame and the highs occur in February, March or June depending on the strength of the rally. Since the dollar has been so one sided this past decade, (especially the last few years) the rallies we've seen (or haven't seen) usually fizzle out early. Thus the potential peak or pullbacks should be in February, March or June/July if the dollar does in fact have a medium term rally. Therefore, if the dollars trend remains bearish on the longer term , we still should expect a dollar peak in a few weeks, (February) a few months, (April) or by the beginning of summer. DEPENDING on its strength or lack of will determine which peak point the dollar reverts back to down. If the dollar has any seasonality, the next big move down (in a strong trend) won't be until summer.

This also suggests that gold's next BIG MOVE might not be until summer arrives. That doesn't mean that gold can't move higher, but it does mean that the strongest time for gold will probably be the second half of the year and not the first half. However the dollar has a pretty good pullback seasonally at the end of March as well. If gold is indeed still strong and the underlying fundamentals that got us here are still in effect then the potential for gold to make a solid bottom could be in that March timeframe as well.

Another commodity that usually comes alive in the March timeframe is the oil market. And it plays well with the increased activity for vehicle travel, vacation time and peak increased springtime business.

In that same update from December 11th we made the following observations and speculated on the price of crude saying:

Odds suggest that a rally attempt should develop from this 65-70 dollar area. SHOULD OIL MOVE BELOW the 200 day average at$ 65, then the potential for a move below 60 towards the red support line will be a potential area for a late winter bottom. Look for December or March to provide the lows in crude.

As you can see from the chart below the oil rally did indeed develop from the 65-70 area (69.81 was the low). Since then we got the rally we projected and now oil is on its way towards a late winter low. Whether the downtrend will continue to late winter and below 60 is yet to be seen. However, this is a great time to update the outlook we had then.

If we zoom out on the chart below just a bit we can see the 100 day (blue line) and the 200 day (red line) moving averages are getting to be very close together. And as technical analysis would have it, price is right in between both moving averages. To illustrate how actually stable crude oil has been we can see that today's price is at the same area as the June high and the summer prices (July/August/September)

So in the crude oil market there's a short term decision point coming here in February and that is whether we hold the 200 day moving average at 71.50 and/or test the September/December lows in the 65-69 area and bottom out in February. But there is one more level of support and that is the 60 dollar area we mentioned in our December report. If we look now at this 60 dollar area we can see that our long term moving average (green) is sitting right at the same place our lower channel line resides. If we take the July lows at 58 and our lower channel we would speculate that the 56-62 area in crude oil would be a potential low point we could expect if the crude oil market does indeed bottom out in its seasonal March timeframe.

In summary, the crude oil market should bottom at one of the two areas listed above and the ideal time would be in the next 4-8 weeks.

Let's look one more time in the precious metals camp and the charts below.

Gold is currently sitting at the 100 day moving average. We've already seen on our zoom in gold chart earlier in this report that the 1075 area is an important price. Should gold bottom here we would suspect a bounce or rally into mid February. If the oil and dollar seasonal play out I suspect that a February rally would eventually give way to one more correction in line when the oil and dollar seasonal high/low's come into play. Now they won't come in all on the same week, but we can expect within a few weeks.

Should this current support area give way, odds favor a move to the 200 day (red moving average) would be the next likely stop for gold. Interestingly the 200 day average in gold is right where the lower channel line resides and you can't see it on the chart below at 1021.

Finally we have one more area where our long term moving average is and that area is at the 966 price area. If we combine the September low at 980, we could say that major medium term support would be the 966-980 area. Although that sounds extreme maybe, its only 100 dollars from here and this pullback we just went thru from the high is 140 ago. In any event these are the three areas we are looking at to provide an opportunity for a turning point and rally. Therefore we favor a Feb/March low and a spring rally when we look at the overall picture.

And finally let's take a look at Silver below.

Here too we can see that silver is trading in between the 100 and 200 day moving average as this week's range touched both averages and price is sitting in between both averages.

Silver is also reaching an oversold area as its position is near the averages, the lower channel line and the Williams indicator at the bottom of the chart is also flashing oversold. The signal comes when the indicator moves OUT of oversold and begins to head back up.

Finally we see our long term green moving average is at the 14.40 area. Observe how this moving average caught the February 2008 high when price touched the average at the same time that it touched our upper channel line. Then in August and September of 2009, price this time pulled back down and kissed that average from the upside and AGAIN the price touch was at the bottom of the price channel and the fall rally took off from there. Should silver break down from the lower channel line and the 200 day moving average, the potential will be for silver to drop to this key average in the 1440 area.

In summary, we think this current pullback has a good chance of bottoming at one of these price zones and will probably follow the seasonal aspects that gold takes.

The key of course is not guessing which price area these commodities will bottom at but to observe price action and look for setups where we stand the best chance of catching the trend once this correction ends in these commodities. The medium and long term trend is still up in commodities. However, we have recently seen shades of 2008 where all commodities go down while the US Dollar rises. This is the one thing that traders and investors (and we also) must keep an eye out for.

We pay attention to the short term movements in the same manner we do these medium term trends. When our short term signals line up with these medium term points, we isolate areas of low risk setups and take action. We invite you to stop by our website, check it out, and maybe get on our e-mailing list.

We're looking at potential setups developing in the metals and oil markets all the time. This year promises to be a challenging time to be involved in these markets and the ability to turn a profit will be the result of getting a good low risk setup. That's something we work at all the time.

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John Winston

Author: John Winston

John Winston
technicalcommoditytrader.com

John Winston is the technical commodity trader analyst. He provides detailed technical analysis for popular commodities like gold, silver, copper, oil, and natural gas. By focusing strictly on these commodity price movements trading become strictly technical and simple to trade. His free trading reports are available at his website: www.TechnicalCommodityTrader.com

Contact John at: Info [@] TechnicalCommodityTrader.com

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