Gold drives the entire PM
complex, it is the key to everything.
Ultimately the gold stocks and even silver and the silver stocks follow gold in the
end. They are effectively gold
sentiment plays that amplify gold’s own volatility. If gold heads higher, sooner or later
silver and PM stocks will follow.
If gold gets weaker, silver and PM stocks usually mirror this behavior
right away. So we’ll start
with gold.
Gold bottomed in mid-August
right at its 200-day moving average.
Then it started surging higher in the magnificent uptrend rendered
above. It remained within this
trend channel, carving higher highs and higher lows, until late
February. Then it started heading
above its upper resistance line on its way to a new all-time high. By mid-March, gold had rallied an
impressive 54% in just 7 months!
PM traders were pretty
excited about this, as gold closed slightly above $1000 for the first time
ever. But soon after, the metal
started plunging. In just 3
trading days it lost 9.3%! It
bounced at its uptrend’s support line initially and rallied, but on
April 1st gold plunged again. That
day alone it shed 3.8%, its biggest daily loss in nearly two years. These
steep retreats have wrought considerable sentiment damage.
The 3-day plunge ending
March 20th drove gold under its 50dma.
The precipitating event was the Fed’s less-than-expected rate
cut. This month’s issue of
our Zeal Intelligence newsletter discusses this episode in depth. And then the subsequent April 1st
plunge drove gold below its uptrend support line. Together these ominous technical
tidings have led many traders to conclude that this gold upleg has to be
finished.
It is certainly true that
gold’s uptrend was broken,
but not necessarily its upleg. A trend is an ever-evolving beast, a
human attempt to shoehorn a price progression into a linear path. Thus trends constantly adjust as new
price data streams in. An uptrend
drawn 6 months into an upleg can change significantly from an uptrend drawn 3
months in. Since they are
constantly in flux, broken uptrends rarely bother me.
As the silver and HUI
charts below illustrate, uplegs don’t need to stay in a neat
uptrend. They usually don’t
prove so accommodating. So
gold’s upleg, its major bull-market move higher, can certainly remain
intact even if its path higher is chaotic. Uplegs are driven by sentiment, they
are born in extreme fear and die in extreme greed. And there are plenty of clues above
indicating we haven’t seen serious greed yet.
Leading into its high in
mid-March, gold did not shoot
parabolic. It only rallied 2.2%
total over the 10 trading days leading to its peak. At upleg tops, greed and enthusiasm
tend to wax ecstatic which drives a climaxing vertical surge. At the top of gold’s last major
upleg in May 2006, for example, this metal soared 13.6% across that
upleg’s final 10 trading days!
Without similar euphoria now, a major top is pretty unlikely.
Relative gold, gold divided
by its 200dma, also reflects this lack of upleg-ending euphoria. Note above that gold only hit 1.296x
its 200dma in mid-March. This
isn’t much higher than the 1.273x seen in late January or the 1.222x
seen in early November. At its
May 2006 top, gold soared to 1.389x its 200dma. And much higher levels (up to 1.670x)
were seen in the last Stage Two uplegs of the 1970s.
Without similar stretches
over its 200dma today to reflect widespread greed, the odds that this latest
Stage Two (driven by global investment demand) upleg is over
are not high. At +54% so far, it
is even still modest by Stage Two standards. We saw +108% and +94% uplegs at this
stage in the 1970s bull, and the upleg that ended in May 2006 ultimately
witnessed gains exceeding 73%! Today’s
upleg isn’t anywhere close yet.
But if the sharp retreat
over the past month is not an upleg-ending correction, then what else could
it be? A mid-upleg pullback. Periodically during in-progress
uplegs, greed gets a bit excessive but nowhere near upleg-ending levels. So a sentiment rebalance is
necessary. This can happen via a
high consolidation like that witnessed in gold last November and
December. Or it can be via a
sharp pullback to scare traders.
For all the sound and fury
of gold’s plunge, it merely hit a 49-day low in early April. As recently as January, this gold
pullback low had never before been
witnessed in history. So it is
not like gold ever got low despite its sharp pullback. It could simply be consolidating high
to build a base for its next surge in this upleg. In late November analysts swore gold
was correcting too, but look at its surge since then!
Another interesting gold
technical is its 200dma. In its
entire 293% run higher since April 2001, gold has never spent much time under its 200dma. In fact, anytime gold is driven under
its 200dma due to excessive fear it quickly rebounds back. In any ongoing secular bull, the
200dma forms some of the most important support. Today gold’s 200dma is already
above $800 and still continues to rise.
So as long as gold
consolidates high, its 200dma is catching up with its price. Since this 200dma is the most likely
sustained downside target even in a full-blown upleg-ending correction,
gold’s downside risk from here seems minimal compared to its upside
potential. All kinds of factors
remain very bullish for gold, from exploding inflationary expectations to
massively negative real interest rates in the US.
So yes, gold did break its
uptrend earlier this month. But
this does not necessarily mean its upleg is failing too. Trends evolve along with uplegs,
constantly changing. And sharp
extra-trend moves like the spike lower in early April can certainly happen
from time to time. Despite all
the angst it caused, there is still plenty of technical evidence suggesting
we probably haven’t seen the top of this particular gold upleg yet.
Silver’s upleg, as
usual, has been more extreme than gold’s. It was up over 80% at best as of early
March, quite a gain for a relatively short 7-month timespan! Silver’s behavior is very
interesting as it is illustrative of the kind of chaos seen within uplegs
that doesn’t necessarily portend their ends. Silver’s consolidation lower in
November and December nicely demonstrates these technical principles.
Silver wasn’t looking
good technically then. It was
grinding lower in a new downtrend, carving lower highs and lower lows during
November. By mid-December, silver
had fallen under both its 50dma and its major uptrend support line. The technical damage was considerable
so many silver analysts were calling for a sharp correction. This reminds me a lot of how
gold’s 50dma and support breaks are perceived today.
Yet was silver’s
upleg over in mid-December because it was beaten up technically? Hardly! The metal soon started surging out of
those irrational fears from under $14 to nearly $21! While silver does ultimately follow
gold’s lead and gold happened to head higher then, this is still an
interesting episode. Technical
breakdowns in an ongoing upleg don’t necessarily mean it is over. They happen periodically mid-upleg.
Silver was climbing nicely,
at a sustainable pace, until late February. Once it went over $18 though,
speculators started flooding in.
The surge of buying interest made it shoot parabolic in a vertical
ascent. Such sharp moves are
seldom sustainable, but silver tried hard to hold its gains. In early March it consolidated high
near $20, reflecting the high gold prices, rather than collapsing under its
own technical weight.
But when gold plunged on
the Fed decision in mid-March, silver plummeted in sympathy. There was a lot more greed in silver
then, a lot more new speculators who had bought in high, compared to gold. And they sold with a vengeance. Silver fell 16.9% in 3 days and sliced
through its 50dma like a hot knife through butter. As always, this 50dma failure made
traders really nervous. Was
silver’s upleg over?
While 50dmas are generally good support within ongoing
uplegs, this isn’t always the case as December illustrated. Sometimes short-term fear-driven
events can rip through these lines.
But as long as bullish fundamentals remain intact, and sentiment
didn’t get too greedy prior to the pullback, the upleg can still
continue higher. So far, this
certainly looks like the case with silver.
While its 50dma failed in
March, its uptrend support held. At
worst, it merely fell to a 37 trading-day low. The $17 to $18 range where silver has
been consolidating since is still quite high. These levels haven’t been
witnessed since the early 1980s and they are
very impressive. Back in December
when silver was struggling in the $14s traders wouldn’t have believed
that a sharp pullback down to $17
would scare them!
While silver did shoot
parabolic unlike gold, it didn’t go parabolic enough to mark the
probable end of an upleg. In its
10 trading days prior to its March peak, silver rallied 16.8%. This compares to 19.8% in the final 10
days of its upleg ending in May 2006.
And silver only hit 1.465x its 200dma in March 2008, compared to
1.651x in May 2006 and 1.704x in April 2006. By silver’s wild standards, we
didn’t just see typical upleg-ending levels of euphoria. It isn’t known as “the
restless metal” for nothing.
At any rate, silver will
ultimately follow gold’s lead.
So if gold’s upleg is over, silver’s is too. But since I really doubt the former,
the latter is unlikely as well. Silver
started to see some greed in late February and grew short-term
overbought. When gold retreated
on the Fed, silver seized the excuse to vent some greed and it plummeted
sharply. But it still remains
very high relative to this upleg and certainly to its bull to date.
I really don’t think
gold and silver are the problem for most traders. Anyone who has been watching these
precious metals for longer than three months has to be impressed with their prices today even
post-pullbacks. The real source
of irritation is the PM stocks.
Never a sector for the faint of heart, its recent extreme volatility
has really tested traders’ resolves. In March the HUI plummeted 16.5% in 5
trading days!
This sharp plunge easily
knifed through the index’s 50dma and through the line most traders were
viewing as support. There is no
doubt it was an ugly selloff. But
as with gold and silver, the HUI technicals aren’t quite as bearish as
they might appear at first glance.
This is a high-risk high-potential sector and extreme volatility is
par for the course. I recently
explored the HUI’s probabilities of seeing big daily moves.
Starting back in August,
the HUI surged sharply off of those irrational lows. This happened to be the best early massive upleg of this bull
and spawned very high expectations for continuing fast gains. But the HUI’s ascent soon
moderated and marched higher in the uptrend rendered above. Its first major support line that
PM-stock traders were following is labeled as “midline”
above. This held for several
months.
But after surging into
early November to an all-time high, the HUI retreated sharply. This pullback bounced at the support
at the time and looked fine, although widespread calls for a major correction
remained. By mid-December, fear
seized PM-stock traders’ hearts and they sold gold and silver stocks
aggressively. This ugly
fear-driven anomaly drove the HUI well under both its 50dma and support at
the time.
But not only is no
emotional extreme ever sustainable, ultimately the HUI follows gold. When gold started rallying again in
mid-December after its high consolidation, gold stocks surged to catch
up. Soon the HUI was back above
both its 50dma and prevailing support.
It went on to hit new all-time highs in January, February, and March. The key point here is technical
failures don’t have to kill in-progress uplegs.
Actually the HUI had
already pulled back sharply from its upper resistance line twice before the latest such episode
in mid-March. Sharp pullbacks
from resistance are not at all uncommon in uplegs. After trading this gold-stock bull
since its birth over 7 years ago, I have seen more sharp pullbacks during
in-progress uplegs than I can count.
March’s pullback may have been abnormally fast, but it
wasn’t abnormally deep.
Provocatively, this March
pullback ultimately took the HUI to a point parallel with its December
low. This is making me suspect
that support is really at the lower support line in this chart, not the
higher midline traders have been watching. Remember that trend channels are
constantly in flux and their slopes and widths often change over time. If this lower support line is indeed
valid, then the HUI never left its uptrend channel!
And like gold and silver,
the HUI’s interim high in March didn’t look like historical
upleg-ending tops. It only
rallied 5.9% over its final 10 days, no euphoria was seen. The relative HUI only traded up to
1.302x this index’s 200dma.
And this was also about as high as the HUI got relative to its 200dma
in both early January and early November. Historically in massive uplegs in this bull,
the HUI has always stretched more than 1.50x above its 200dma before they
ended.
And while the HUI’s
71%+ gain since mid-August was nice, it was small relative to bull
precedent. The average gain of
all 7 HUI uplegs in this bull before our current one is +94%. And the average HUI gain in its
massive uplegs, every other upleg when it hits new highs, is a whopping
+136%! And with gold looking very
comfortable in the $900s, it is hard to imagine this PM-stock upleg not
proving massive.
So technically, the HUI
certainly didn’t look like it hit a major upleg top in mid-March. Nor did its characteristic sharp
pullback from resistance to support look like a post-upleg correction. Technically it merely looked like a
sharp mid-upleg pullback. The HUI
never left its uptrend channel if the new lower support line above proves
valid. And mid-upleg 50dma
failures in this index are not uncommon at all.
In light of these gold,
silver, and HUI technicals, the evidence seems to support a couple key
theses. First, none of these
metrics became euphoric enough by their own bull-to-date standards to suggest
major upleg-ending tops. There was
no universal extreme greed driving the PM complex as a whole vertical. And without these kinds of technical
signs evident at major upleg tops, the odds favor the subsequent carnage
merely being sentiment-rebalancing mid-upleg
pullbacks.
And sharp pullbacks can
easily pierce technical lines traders hold dear, like 50dmas and current
uptrends’ support. Yet as
long as pre-retreat sentiment wasn’t too greedy and the underlying
fundamental drivers of the upleg remain intact, it won’t end regardless
of short-term technical damage. In
precious metals, extreme volatility within uplegs is just an expected part of
the game.
If you enjoy this kind of
technical analysis, I do a lot of it in our monthly Zeal Intelligence newsletter and
especially our weekly Zeal Speculator alert
service. We maintain extensive
custom charts on our website exclusively for our subscribers as well. Today we continue to add trades in
elite gold and silver stocks since these precious-metals uplegs look
intact. Subscribe today and join us in
the probable run higher!
The bottom line is all
uplegs can be chaotic, especially in the volatile precious metals. As any upleg evolves, its best-fit
technical uptrend channel is constantly adjusting to reflect all the latest
price information. Thus mid-upleg
failures of uptrend support lines and even 50-day moving averages is not uncommon. From time to time excessive fear can
spawn sharp mid-upleg pullbacks.
So to this point, nothing
technically alarming has happened in gold, silver, and the HUI. Sure they fell sharply, and it was a quick plunge, but it was from
above resistance to down near or under support. Prior to these sharp pullbacks,
neither gold, silver, nor the HUI exhibited technical behavior like that seen
in their own respective past major upleg tops within their bulls. So
odds are these uplegs remain intact.
Adam Hamilton, CPA
Zealllc.com
April
18, 2008
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