Silver, Gold, Portuguese Sovereignty

Silver has continued to rally and only a CME margin hike was able to stop a large breakout above $38 which took place intraday. Due to the hike SLV finished with volume of over 55 million ending the low volume rally that has taken place over the past week. I missed the call of a pullback but it appears that this margin hike may be the catalyst for a consolidation back to the – you guessed it, 20 Day MA.

The 20 and 26 Day MA’s should provide support as the price pulls back to $35. If price activity finds solid support at $35 and can then move higher, then the recent breakout can be confirmed but the margin hike appears to have stunted any short term momentum that had been in the market this week. I wasn’t sold on the daily trading volume on SLV and the next break above $37-$38 should be with much higher volume to confirm the move.

Gold was also about to make a breakout above a double top but that attempt was stopped by the CME. Since gold made it’s YTD lows in January, it hasn’t confirmed and break of the 26 or 50 Day MA and those support trends will be critical should gold continue to lose steam after today’s action. If gold can stay above those moving averages, it has a really good chance of beginning the next leg in the bull run.

Despite the probabilities I’ve mentioned, the real force behind the equities and precious metals markets that is soon to come is the decision by the Portuguese government on whether or not to allow their government to cease to function. I have read reports that they will need a bailout package of at least $100 billion. If they do not pass the bailout, there is a good chance that their government will no longer operate. Ironically, we are in exactly the same place we were last year with Greece. The decision to bailout the Greeks was made over the weekend and the following events included a choppy equities and commodities market for the duration of the summer until the Jackson Hole speech. I believe that we’re in for similar treatment here. If the Portuguese are bailed out, the dollar may rally as it is now at lows not seen since 2009 and the Euro is testing resistance at $1.40 though that setup could be for a double top. This could setup a legitimate correction in all equities and commodities.

On the other hand, if they allow their government to fail, then the dollar will likely plunge and commodity prices will go through the roof. The Portuguese have made it clear that they are attempting to find alternatives and that they do not want a bailout, however they may find themselves learning the Lehman/Bear Sterns way and be forced to accept the ECB’s bailout package. As a gold and silver trader, I recommend using a prudent stop loss to hedge yourself against what could be a multi-month correction period.

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

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