Gold And Silver Bounce Again, One More Speed Bump Before Breakout

Yesterday gold and silver found their footing after the Japanese in collaboration with the G-7 have decided to intervene in the forex market for the first time in 10 years. Typically, that would mean selling for gold and silver due to a stronger dollar, but the Yen held onto weekly gains during Friday’s western trading session as the dollar remained unattractive. As stated on Thursday, it looks as if the dollar/gold correlation is not the priority on Wall Street and most investors are more interested in trading the Yen which is why the precious metals and forex markets have looked out of character. Based on momentum and certain technical indicators, I believe that this trend will continue briefly before the traditional correlations begin to matchup once again.

The uptrend in GLD remained intact leading into the end of the year when it finally broke down and rounded out in late January. It broke through mulitple resistance levels with almost no selling pressure making a new all time high at the beginning of March. Since then it has traded down into a flag and support appears to be around $134, right in the vicinity of the 50 Day MA. The volume has also diminished from the $139 peak to recent activity outside of the bottom the market put in at $128. In short, this is beginning to look like a textbook cup and handle pattern. For those who don’t know, this a bullish continuation signal and could turn out the be the catalyst for the next leg up in the long term bull market. If this pattern plays out, expect to see GLD reach $145 before encountering meaningful resistance. That would mean a price target of just over $1500 for spot gold.

Based on price activity here, I’d expect the Yen to remain elevated while gold finishes it’s consolidation. $134 mainly acted as resistance for the last 3 months of the year as the GLD was never able to find enough momentum to stay above that pivot point for long. However, following the month-long bear rally and recent flag continuation pattern it has formed, gold is making a strong case that it is done underperforming the commodities sector.

The 3 year chart shows us the same signals. Previously, there have been instances where gold tested the 20 or 26 MA twice before making new highs and this time price activity appears to be repeating itself. The RSI, MACD, and STO aren’t in typical positions that you would see before a breakout is about to take place. Expect these oscillators to level out once more before gold is ready to find it’s last support level.

Moving on to silver, I believe that the chart here adds to the analysis on gold as we now have a bearish engulfing candlestick for the weekly chart which tells us that the market isn’t ready to make news highs yet and some profits may need to come off of the table before silver will be ready to breakout again. I believe that the lower trendline will snap next week and support could be as far down as $31 based on the horizontal support trends and the 20 Day MA. If silver is taken down that hard, it will be extremely bullish for long term strength and should present a clear cut buying opportunity similar to the one we received in late January.

To add to the engulfing candle on the weekly spot chart, the volume on SLV for the last two trading sessions in which we rallied has been just over half of the average daily volume. This is a textbook indicator of a false rally and though we found support at the 20 Day MA, the volume backing needs to be there to validate the price activity. Combining that with the large trading gap and the weekly engulfing candle shown above, and it looks certain that silver, like gold, will move lower over the next week at least depending on how hard of a selloff takes place. In addition, yesterday’s bounce makes for the third lower highs since the $35.78 peak. This is typical during a pullback and it should continue until it finds legitimate support.

I expect gold and silver to breakout at the same time but I think that silver will underperform gold during the next consolidation due to how far it is overextended from support as well as the overbought conditions on the RSI and MACD. This should be a solid buying opportunity as these support levels are soon be left behind as the bull market rages on the back of quantitative easing and the continued intervention in the currency and financial markets by policy makers around the world.

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

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