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Gold And Silver - Market Says Decline Not Over. Silver More Pivotal Than Gold
Developing market activity is the best and most reliable source for market information. All you have to do is follow what the activity is saying, and you will have the clearest idea of where the market is headed. For the near term, of heightened concern for many, the market says the current decline is far from over. Price may not be far from the low of the decline, but the trend is down, and it takes time to turn a trend around, so do not expect to see a dramatic rise in the price of either gold or silver.
Our downside target of $1600 gold has been exceeded, while the $28 target for silver has not been met, although in horseshoes, it would be a leaner. [See Decline Not Over, 1st and 3rd charts, click on http://bit.ly/WWXFlt]. Next week, who knows?
The biggest advantage in letting the market speak loudest is that all one need do is follow its path, for it always leads to a logical conclusion. The conclusion may not fit with one's hopes or expectations, many times, but the market never misleads in its intent. It is not always easy to read, occasionally, so during those times, it is best to do nothing until a clearer direction becomes more discernible.
This week, the silver charts lead because we see them as more telling than gold. The monthly is our starting point. It will become apparent why silver warrants more focus when compared to gold as you view the respective charts.
We continue to mention the bullish spacing because it puts the metals into an important context from a larger perspective, and the spacing lets us know that silver and gold remain in uptrends with gold net stronger, but just not for the near term. A look at the monthly gold chart will make that perfectly clear.
This does not mean gold/silver will not still go lower. For now, developing market activity continues to point in that direction. Prices may be at or near a low, but we see no ending action that says one has been reached.
There is a very positive development in silver, even after last week's sharp decline. An important change in behavior occurred in August 2012 when silver rallied out of the doldrums for two strong months, "2" on the chart. What is somewhat impressive about the current decline is how it has been labored relative to the two month rally in mid-2012. After 4+ months, [it says 5* on the charts, the * signifying the 5th month is not over, and no one knows where it will end], that breakout area is still holding.
Compare the two strong rally bars with the 5 overlapping decline bars. They tells us sellers are expending a lot more effort to drive price down to the starting level where buyers took over last August.
It could be that February will continue to fall and go under the 26 level, we do not know. All we can do is look at what is known, to date, and draw some conclusions. Seeing more detail in the weekly and daily charts may help.
When you compare the weekly gold chart to silver, you will see how gold is weaker for the near term. We do not follow any fundamentals, but it could well be that the underlying supply/demand factors for silver, with its industrial use, are far more important than viewing silver as a poor man's gold substitute as a store of wealth. Similar usage demands do not exist for gold.
Price remains in a down channel, just it is slightly under, and it is also near the breakout level from August 2012, both concurrently offering potential support in this negative market.
An explanation is provided in the left corner of the chart concerning the dashed portion of the lines. They extend from 3 and 2, respectively, at the point in time just after swing high 3 is known. How price reacts to these lines provides important market information.
In the previous article, Decline Not Over, http://bit.ly/WWXFlt, also on the third chart we commented how price failed to reach the upper channel line, see arrows below, and maybe head back toward $28? This is how one pays attention to the market's message in order to avoid surprises or be on the wrong side.
One reason why we say silver may be at/near a low point is the climatic volume, three days ago, which also drove price under the lower channel oversold line. Markets often end in excess, and sharply higher volume always warrants attention for it almost always entails a transfer of risk from weak into strong hands. Smart money buys bottoms, and they show their hand by increased volume.
The volume from last Wednesday is mostly all short-covering. Net new buying usually comes in after a bottom is confirmed, and that is a caveat for acknowledging that price can still go lower, maybe not by much, but sill lower, to whatever degree. There has been no indication of confirmed ending action, yet.
The last two trading days have much smaller ranges and overlapping bars. The market is telling us there was zero downside follow-through after Wednesday, and overlapping bars reflect a balance between buyers and sellers at a point where sellers have been in total control. These are littler messages, and they need confirmation before acting on them.
It is interesting to note how price stopped just above the $28 support. Why? Why not just crush buyers even more, while sellers have so much control? The questions address what we implied above, are sellers still in total control?
For different reasons, as explained so may times before, buy physical silver, especially at these lower levels. As to futures, stay away from the long side. Picking bottoms is one of the surest ways of losing money. Better to just give your broker a big check and make at least one person happy. You also limit your "loss" to the size of the check.
The trend is down. Consistent money is not made trading against the trend. Period.
The monthly gold chart screams bull market! The bullish spacing is huge. As a reminder, bullish spacing exists when the current swing low remains above the last swing high, and we have drawn heavy lines for each. When smart money is so positive on a market, there is no waiting to see how the last swing high will be retested. The urgency to buy is so strong that a "space" is left behind, and it says how strong is the buyers' conviction to the long side.
Context is important. Price could break the $1520+ lows and gold would still be in a very strong uptrending market. It will simply take more time to overcome resistance from the $1900 highs established in September 2011.
An important point to keep in mind: the market does not care about your timetable. In fact, it does not even know what your expectations are. All it does is provide price and volume information. It is otherwise neutral. How you choose to respond to the flow of information is up to you. For now, it is telling everyone that it will be some time before an uptrend resumes.
Here is where you can see how gold is weaker relative to silver. We placed a box around the four-month activity that is acting as a buffer to the current price decline, in addition to the previous occasions when this level held, forming strong support.
This is our read of what the market is saying, right now. Focus on the last two weekly bars. The last one is just slightly smaller than the second one, but the volume was greater. The energy behind a price move is volume. When you see greater volume but with a bar that is smaller than the previous one, it is saying buyers were entering and meeting the effort of sellers. This is what prevented the range of the last bar from extending lower. It is a small "tell," as it were, but worth noting.
We think there are no accidents in the market, which is why we pointed to the wide range up bar from August. It began an important rally, and gold's decline just happened to stop at that level. Were gold to continue lower next week and erase that support, then that low would lose its potential significance. Everything must be confirmed by subsequent action.
Observing the second and third bars from the end, the high volume on the third bar shows buyers were present, based on the location of the close, off the lows. The second to last bar made a new low, just barely, but closed on the high of the range and above the previous day's close, telling us buyers won the battle that day. This is another indication of buyers overcoming effort of sellers at a point where sellers are supposed to be in total control.
This may not turn the tide yet, but there is some evidence that buyers are making a show not seen in the past several trading days. As to the last bar, it was lower on the day, but not very deep into the last two days' lows, and that says a weak effort from sellers.
Buy physical gold, without blinking. Stay away from the long side of futures. Only some unexpected surprise can turn these markets around on a dime, and anything can happen, but barring that, it takes time for a trend to turn, and without evidence that the lows for this down swing are confirmed, gold and silver have a lot of work to do.