Half Day, Dollar Up, Chinese Margin Hike, Monthly Volume

The entire precious metals sector was down substantially today on news of a Chinese Rate Hike on margin requirements for the Shanghai metals exchange. The hike included base metals as well as precious metals. Naturally, the dollar rallied, and I believe that this margin hike will most likely be another catalyst for more dollar strength which is something I predicted the other day. I don’t think that this is a coincidence because after all, the fundamentals drive the technicals. It is not a coincidence that the dollar recently formed a reverse head and shoulders pattern, and on the same day that it completes the last shoulder it breaks up through a 6 month long downward price channel on news of Ireland debt as well as a flight to safety from Asian markets due to the Korea incident. This is all happening right in front of us and there were plenty of signs over the last three months that pointed to weakness in the US markets. Even at the beginning of this bull market, there were red flags coming up which makes everything that happens after that initial move suspect.

Note the remarkably low volume for this month in comparison to the last 3 years of trading. Remember, the indices were up in the beginning of the month and the Dow was in fact positive for the month of November up until Wednesday. That means that for 3 1/2 weeks we actually had a rally on low volume. The are 2 days left in the month of November to trade and that leaves time for the monthly candlestick to make a bearish shooting star formation if those two days are both down.

When I called the top in gold and silver, it was clear that we would retrace but at the time I was not sure of the degree of the reversal, nor the length. I remember suggesting that it may be brief like the previous one(on October 7th), but that hasn’t happened. I believe that it was partly due to a wrench that was thrown into the markets (AKA QE II). The fact that qe II was announced not long after the key reversal made traders disregard any other news and forced the markets higher despite there being good reasons for a slow down in buying. Perhaps the reason why we had the key reversal on November 9th was because the one on October 7th was never allowed to play out, thanks to the Fed.

In any case, we have clearly hit resistance in the gold and silver markets and like the dollar/euro have traded in lockstep. What I mean by that is that gold and silver too have potential head and shoulders formations that mirror the reverse head and shoulders on the USDX.

Euro/USD

Head and shoulders with resistance around 1.38 and possible support well below the 200 Day MA.

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SPDR Gold Shares

Head and shoulders with resistance at 135 and support near the current 200 Day MA (roughly 122).

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iShares Silver Trust

Head and shoulders with resistance at about 27.75 and support well below anything on the 3 month chart. You’d actually have to erase the entire rally to find support according to the depth of the formation.

I don’t think that we’ll actually lose the entire rally but according to the chart, it is a possibility. Markets tend to get far more overbought than oversold, and in low volume bull markets other technical indicators are thrown out and forgotten. However I have proven that those indicators should never be ignored and should be a part of everyone’s analysis. This is why they say the markets take the stairs up and the elevator down. Once the bad news begins to catch on, everyone attempts to lock in their gains at the same time, while the smart money is already ahead of the trade. Any long’s at this point should be cautious and modest.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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