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Last
week, we wrote that gold and gold stocks could be at - or very close to - a
bottom. So far so good, as the miners rallied out of oversold conditions.
Gold
found support at the 35 weeks Exponential Moving Average, and RSI held above
50. That's a good sign so far:
 
Chart courtesy stockcharts.com
Sentiment
in Gold is back at very low levels, which should be bullish for Gold
(although it could always drop some more):
Chart courtesy sentimentrader.com
However,
when we look at the daily chart, we can see a bear flag forming right now,
and the move out of oversold conditions is accompanied by decreasing volume.
That's a negative sign, and it looks like the Bear Flag could be taken out to
the downside anytime now. That would cause both the RSI and MACD to turn down
again.
Chart courtesy stockcharts.com
Sentiment
in the mining companies, as measured by the Bullish % Index is also at
historically low levels, indicating that miners are severely oversold.
However,
in 2008, the index fell to ZERO, so we still have the possibility that we
haven't seen the rock bottom yet. If that's the case, last week's bottom
would only be a temporary bottom in order to work off the oversold
conditions.
When
we look at Fibonacci Retracement levels, we can expect 450 on the HUI index
once the pink support line would break. So far, the pink support line should
provide support until proven otherwise.
Chart courtesy stockcharts.com
That
brings us to silver. Here we can see that sentiment reached extremely low
levels (30.03%), which COULD bode well for silver prices going forward.
However,
we have to see things in perspective. Back in 2008, sentiment remained very
low for a couple of months, as silver kept falling.
Chart courtesy sentimentrader.com
When
we look at patterns of "higher highs / higher lows" and "lower
highs / lower lows", we can see that sentiment is a good indicator of
what will happen to silver:
I
have highlighted 3 times with a blue circle whereby the price movement was
not supported by sentiment. Either we had a higher low in price and a lower
low in sentiment (bearish), a lower low in price and a higher low in
sentiment (bullish) or a higher high in price and a lower high in sentiment
(Bearish).
Based
on these patterns, we would like to see a higher low in sentiment accompanied
by a lower low in price.
In
the chart below, we can see that Silver recently retraced exactly 50% of the
move from 3.50$ (the 1993 low) to the top of $49.82. The next Fibonacci
Support level comes in at $21.18
Chart: Prorealtime.com
Although
the low $20's might seem unlikely now, it's definitely something we have to
keep an eye on. Even if silver drops towards the low $20 (or even slightly
below), it would not harm the long term uptrend at all, as can be seen in the
following chart (the yellow pattern is based on the price action of 2008):
Chart: Prorealtime.com
When
we look at the CFTC COT reports for silver, we can see that the Commercials
A.K.A. "Smart Money" have reduced their net-short positions
substantially, to bull-market lows.
This
seems to be bullish for silver, because if the smart money moves out of silver
short positions, this could mean they are foreseeing higher prices.
Look
at the chart below to see what happened during this bull market when
Commercial Net short positions were this low.
It
looks bullish, doesn't it?
However,
perspective is everything. Of course we are in a bull market (since the early
2000's), but if we look at the COT reports going back to 1986, we can see
that the Commercial Net Short positions have been this low on several
occasions, and it didn't always mean higher prices:
However,
as the Open Interest fluctuates, it might be better to look at Commercial Net
Short Positions as a Percentage of Open Interest (CNSPOI).
We
can see that during the bear market, the CNSPOI was setting higher highs,
while during this bull market, the CNSPOI is making lower highs.
The
CNSPOI has also dropped to historically low levels, which MIGHT forecast
higher prices, although this has not always been the case:
We
think that everything comes down to the US Dollar. When the US Dollar falls,
metals generally rise, and when the US Dllar rises, metals generally fall.
We
can see that the USD Sentiment is very positive, meaning we could see a
pullback. However, the fact that we had a lower high in Price early 2011
combined with a higher high in sentiment, was foretelling us that something
was going on in the USD market, just like in 2008 & 2009:
Chart courtesy sentimentrader.com
One
last thing: when we compare FXI (a China ETF) with the Nasdaq Bubble, we can
see that FXI is imitating the Nasdaq Index:
Chart: Prorealtime.com
If
China drops a bit more, it might be time to buy China and everything
China-related (read: COMMODITIES)
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