Gold and Silver Trading Alert: Silver's Upswing and Euro's Resistance
Gold & Silver Trading Alert originally published on Feb 19, 2014, 8:57 AM
In short: In our opinion, no positions are currently justified from the risk/reward perspective.
Not much happened in gold and mining stocks this week, but silver moved higher. We sometimes saw this type of divergence right at the local tops, but it was not an extremely reliable sign. Let's take a closer look (charts courtesy of http://stockcharts.com).
As the situation didn't really change yesterday, the comments that we had made previously didn't change as well:
Gold moved higher and the rally above the declining resistance line is now quite significant. However, it's overbought on a short-term basis. Taking the RSIindicator into account, it's even more overbought than it was in August 2013, when it was trading $100 higher. The Stochastic indicator is about to flash a sell signal as well. This suggests that we will likely see either a beginning of a new big decline or a correction in the rally (if one has really already begun). Either way, it looks like there soon will be a much better opportunity to go long than the one we have right now.
Silver has finally moved visibly higher. Friday's rally took the white metal above both the rising and declining resistance lines and it moved higher this week as well. Did the outlook change substantially based on that? Not necessarily. The move was sharp and silver has been trading above the declining resistance line for just a few days now.
More importantly, silver moved to its 50-week moving average, which served as strong support and resistance numerous times. The last time that it served as resistance was right after silver rallied sharply after the previous long-term cyclical turning point.
Consequently, even though silver's recent rally is impressive, let's keep in mind that the same (actually, the rally was much more significant back then) was the case in August 2013 and was still followed by declines. In the coming years, silver will probably rally very far - well over its 2011 high. However, as far as short-term is concerned, it seems that traders and investors might expect at least (!) a short-term decline.
The third and final metal that we would like to feature today is palladium. The situation hasn't really changed this week, but the implications for the precious metals sector remain in place.
Palladium moved to its declining resistance line without breaking it, and if you've been following our analyses for some time, you know that this has been signaling local tops in the entire precious metals sector. Consequently, whatever happens months from now, it still seems that we will see a short-term downswing shortly.
All in all, it looks like we are likely to see a correction or another big decline soon. Let's see if this outlook is consistent with the situation in the currency markets.
Much of what we wrote on Friday remains up-to-date:
It's been over a year now since the USD Index broke above the long-term resistance line, which is now support. The index is therefore likely to move much higher, probably to the 85 level. The last time we saw a rally of similar magnitude was in the first half of 2013, which is also when the precious metals sector plunged.
On the previous chart, we see that the rally could begin shortly and on the above chart we see that when it really starts, it can be quite significant.
The impact on the precious metals market is likely to be major and negative, unless metals and miners prove - and do so for more than a week or two - that they can rally along with the dollar's upswing (like it was the case in early 2010).
On the medium-term basis, we have the US currency at important support and also at the psychologically important 80 level. It definitely supports at least a correction in the USD Index and the precious metals sector, and it could also cause a bigger decline...
... Especially that the short-term support line - based on the October and December 2013 lows - was also reached.
There's one more important line that was just reached.
The Euro Index is now even slightly above its long-term resistance line. This line kept rallies in check and the situation now is similar to what we saw in December 2013.
This further supports the bearish outlook for the precious metals market, at least for the short term as in the recent weeks short-term moves in the Euro Index and in gold, silver and mining stocks have been quite in tune with each other.
At this time precious metals are amplifying euro's gains but if the decline in the euro is huge, the above strength will likely not be enough to prevent a decline in metals and miners. The point is that the resistance is significant enough to generate a big downswing.
Overall, what we wrote about the current situation in the previous alert remains up-to-date:
The "problem" with gold's rally is that it is very unlikely to continue unless the USD Index gives in and declines below the medium-term line. We already saw a move very close to it yesterday and in today's pre-market action. The USD is after a long-term breakout, and at medium-term support, which is a powerful bullish combination for the coming weeks.
If the USD Index breaks lower or it rallies strongly (not a daily rally, but at least a weekly one) and gold refuses to decline, then we will have a good indication that it's safe to jump back into the precious metals market. At this time, we have an encouraging rally, but we also see a major threat (the USD is likely to start a significant rally) that is just waiting to impact the market.
If the USD rallies - and it seems likely that it will relatively soon - we will quite likely see invalidations of breakouts and subsequent plunges. This will be likely until either the USD breaks below the medium-term support or precious metals prove that the dollar's substantial rally is not a major threat.
Even if the next big upswing in the precious metals market is underway, we are still likely to see a decline shortly as the situation in gold is now overbought on a short-term basis (...)
We also have bearish indications from the palladium market and a quite significant resistance on the silver market in the form of the 50-week moving average.
Trading capital (our opinion): No positions.
Long-term capital (our opinion): No positions.
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