Gold & Silver Find Support, Head And Shoulders In Euro Trade

Today was reminiscent of the flash crash. The day that the flash crash took place, CNBC continually ran clips of riots in Greece and the DOW was already down 400 points before the crash took place due to concerns of defaults in Greece, gold and silver were up substantially as a safe haven, the EUR/USD trade reversed very quickly, and the DOW had previously been attempting to take out a long term resistance level. Today, CNBC ran nonstop clips of rioting in Egypt, Lebanon, Jordan, and Yemeni. There wasn’t quite default concerns but the S&P downgraded Japan’s credit rating and gold and silver surged off of their YTD lows on high volume. The Euro Index and FXE were both down for the first time in weeks as they failed to take out a long term resistance level – oh yes, and that appears to have set up a SHS pattern.

The Euro was unable to take out $137.50 which has served as a pivot point in the trade for a long time. FXE rallied for 13 consecutive days defying overbought signals along the way. Goldman finally closed their long position. The momentum appears to have all but faded and a grim 7 month SHS pattern has been painted onto this chart. Based on the head and the neckline, the price target to the downside would take out the 2010 lows however I don’t think that scenario is likely – though it was certainly possible given the situation in Europe and considering that markets tend to rally without cause when they begin to form a topping pattern. It is likely however that if this pattern does play out, that $123 will act as long term support.

Nine out of the last ten years gold has hit it’s yearly low by May and seven out of those ten, it’s done so in the first quarter.

Moving on to gold, the long term moving support is still intact and the spot price appears to be adjusting the $1325 support level as I suggested it may earlier this week. I think that we are more or less in an absolute bottom in gold as there is very little room to move to the downside from here without snapping that support trend. There will most likely be some intraday and intraweek volatility but I believe that any opportunity to buy below $1325 should be taken, but I don’t advise waiting for it to dip beneath it to do so.

Some updates from the fundamental side – regarding the selloff in general, I’ve been reading reports that one hedge fund may have had a big hand in “blowing up the gold market.” Dan Shaks had a large stake in gold futures which allegedly caused the recent volatility. Take the story however you wish, but I think that this will help bring buyers back into the gold market. Sometimes all it takes is a wild explanation like this to be good enough to add momentum for the market to complete a reversal. Some harder fundamentals for gold are the COT reports which are showing signs that buyers will be coming back shortly. The mainstream media may be giving the anti-gold crowd a lot of air-time right now, but the market sentiment is crystal clear – today’s COT report showed that over 25,000 short gold contracts were covered this week compared to just over 12,000 last week, and 4,000 the week before.

Silver had a big day closing near the highs at $27.93. It appears that it may not test $25 after all, (shame because I was looking forward to buying there) and $26.50 looks as if it could be our support. The top trendline is loosely aligned with the 20 Day SMA and a close above that on high volume will confirm a reversal. It feels as if we are getting much closer to another big run in physical silver as more and more topics regarding the supply have been brought up. Silver may be in backwardation, but if there is a delivery squeeze, it could send silver sky high.

Making A Case For This To Be A Bottom

SLV finally managed to have an up day on good volume. The volume today beat the volume of 9 out of the last 10 trading days and has been the only positive trading day for silver to have high volume behind it since the beginning of the year. The buying volume has been exactly what has been missing from silver for weeks and today could have very well been the day where that begins to turn around. In addition to the volume, SLV formed a bullish engulfing candlestick over the previous day’s candle, which when combined with today’s volume is an added indicator that this is a reversal. The COT reports also show that last week 102 short contracts were opened – (as a contrarian would say, “good, it means that silver is bottoming”) – this week, 2,262 contracts were covered, the most in 7 weeks.

So concerning the possibility of this being a bottom in gold and silver, I think it’s safe to say that the DOW’s failure to break 12,000 means that money will move from popular equities and into commodities again as the global economy is yet again on the hotseat. Between the rioting in europe and the middle east, and the downgrading of Japanese credit, investors will pour into gold and silver as safe havens and I expect them to soon make a run at new highs. The bullishness in the COT reports combined with talk of supply shortages and continued inflation in undeveloped nations, and the sheer fact that we’ve been well oversold for weeks indicates that buyers will be ready to re-enter the market again in the coming weeks.

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

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