Gold And Silver Hit Hard One Day Prior To Options Expiration

As I suggested yesterday, the VIX made a run at resistance though was unable to close above 18.63, and as expected, QQQQ was also down substantially on a convincing amount of volume. It’s not certain that the VIX will break support as the week of options expiration is typically volatile, however, given the weakness in QQQQ, AAPL, and the rest of the equities market, it would not be surprising to see a slowdown here in equity prices.

Gold and silver were both beat up across the board just one day before options expiration which due to the high volume on some of the out of the money calls, I had at one point high hopes for. However that has not been the case but for most this has been regarded as a buying opportunity but there are still plenty of reasons as to why gold and silver can be better bargains in the near future.

Silver had its worst day in months and closed at $27.48, down 4.47%. After an extremely rough week, there is a bullish divergence building up on the 5 day stochastic which when given the recent selling pressure, should indicate that a bounce is in order. However, I don’t expect this bounce to be much more than the market taking a breather before continuing to trade lower – it seems to me that we are in a confirmed downtrend. Just today, silver’s closing price lined up to complete a lower trendline that began after the final 20 Day MA bounce during silver’s parabolic run. I think silver may trade between those trendlines pictured above until the next test of support.

Currently, we have a few areas where there appears to be support for the price to fall back to. The closest appears to be around the $27 range, the next closest is at $25, and the last is at roughly $23.25. My concern with these support levels is that given the extremity of the bullish run that began in August, the price did not stop to consolidate for more than a few trading sessions. This indicates that the support levels that are in place may be relatively vulnerable to the offensive attack from the bears. Months ago, I expressed this concern as we ascended to new highs, but the price continued to push on, so keep in mind that silver is being beaten up because of the beating it gave the short sellers for consecutive months.

The volume on SLV today climbed higher than 42,000,000 and the amount of selling volume that has followed price movement over the last two weeks has correctly forecasted the current mood of the market. I don’t expect this trend to change soon given that volume breakouts are a very reliable indicator, and I will remain bearish on the trade for the time being. I believe that the most prudent play from the long side would be to wait for confirmation that the selling pressure has subsided.

Make no mistake, silver is one of, if not the most undervalued asset on the market and I am extremely bullish on silver’s long term fundamentals. However, I am bearish towards the short term price activity because indicators are concisely suggesting that mometum is with the short side of the trade. I find this all very exciting and I am glad that the metals are not invincible to price consolidation because that means that this trade is not yet over-crowded and that there is still time to accumulate positions in bullion and producing miners.

Gold was also slammed hard, down for a loss of $23.90 (1.75%). In contrast with silver, it hasn’t done anything overly exciting compared to the other commodities such as agriculture and so on, yet it continues to simply chug along at a controlled pace which makes this correction seem a lot less violent.

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Gold has been so steady that even the recent breaking of the 50 Day MA seemed unnaturally quiet at least when compared to the silver market which had been stealing the spotlight. Two things jump out on this chart – the support level of $1325, and the possibility of a symmetrical wedge pattern that has broken down with the close of today's candlestick. The breaking of that wedge pattern means that $1325 should now be the support level that will be watching. I expect gold to test it, and in the meantime, the RSI and MACD should have time to finally come down to oversold levels for the first time in months.

I think $1325 holds.

As mentioned above, gold is correcting, but it is being woven down in a very controlled fashion. There isn’t a serious force of momentum behind this trade outside of the volume on the ETF’s. I think the selling pressure will weaken by the time the price makes its way closer to $1325. In addition, if gold continues to trade lower at the pace that it is now, the 200 Day MA may reach the $1325 level at the same time that price activity does which would provide added support.

My biggest reason for believing that gold will not make it much lower is the weekly 2 year chart. Those who follow my commentary know that I have used this chart in the past to find moving support levels.

In short, all consolidations bounce off of the 20 Day moving average, even counting the fact that in some cases, price activity broke down through the MA and stayed there for a week or two. In the cases where it did just that, the price quickly rebounded and almost every time followed through by making new highs. This trend has been intact since QE 1 and to say that gold will permenantly break this 2 year trend is in my opinion, saying that the fundamentals in the gold market are no longer reputable. Gold may pierce through $1325, and it may even have to readjust it’s support level a few points lower, but the long term trend remains rock solid, as do the fundamentals.

Pay no attention to the pundits on TV, and continue to buy the dips. Wait for confirmation of any breakout in this market as you would with anything else. Those who succeed in doing so will be rewarded much more fittingly than those who are buying into overvalued equities and bonds that have been propped up for decades by banks and governments.

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

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