The last couple of weeks has finally seen the resolution of the lengthy consolidation period that both gold and silver underwent. After finally breaking out of that sideways action, the metals launched a short covering rally the other day only to have those price gains stall and both metals again turned lower. So what is really going on here? Fact is, nobody knows but I am growing ever more concerned that a significant waterfall moment is closer than we think with regards to both gold and silver. What follows is my own interpretation of the “gold and silver trade”. You should take everything I say into context with what I have been writing about over the last couple of months and to a greater extent, since late 2011 when I questioned whether we would ever see gold and silver challenge their respective highs again anytime soon.
First we’ll start off with silver and a look at the near term chart.
Note that Tuesday’s rally stalled right at a key Fibonacci retracement level. Silver reversed today but not quite as hard as gold did (which we will discuss later). Silver’s decline on Wednesday bounced off the 38.2% Fib from the breakdown earlier in the month. That level is important. As I see it, a breakdown of $27.41 could see silver return to test the April low of $26.57. I would look to go short on any close below $27.42 for a move to $26.57. The bigger picture is where things get a little more intense.
Note that the down trending channel from the May 2011 high is still firmly in place. Should the April low fail, silver will quickly move to test the very strong support at $26.15. Should that level of support fail, we could very well rapidly move to test the lower end of the channel at or near $20.00.
If gold is leading this price movement then that picture appears clearer.
Note that gold was unable to hold its huge rally to start the week. The rally stalled right at the 61.8% Fib from the decline of the February high. It has now broken down below resistance of the 38.2% Fib of that breakdown and gold’s next level of support is the April low of $1,539. Should that level of support fail, the bigger picture shows us how significant that could turn out to be. (Note that more so in silver than gold, the RSI has worked off the oversold conditions and that the RSI and MACD have turned negative again). This action leads me to believe that the rally earlier in the week was simply a counter-trend bounce to work off the oversold conditions before the decline begins anew.
The large area of strong support is clearly visible on the above longer tern chart. Gold has slipped further from the Fib retracement levels from the October 2011 highs and the price is drawing closer to the strong support shelf at $1520.00. IF $1539 fails, we could see a rapid move to test that $1,520 support which will prove to be a significant battle ground. Should that level of support fail, well, the chart is pretty clear. Other than “round numbers” that the market likes to use as support/resistance, the next true strong support area is not until $1300.00.
With all that said, I have previously written about what I see as a potential head and shoulders forming in the silver picture however I respect the opinions of some other chartists who have emailed me to advise me that my interpretation on that front is not so clear so I won’t confuse my readers by re-introducing that chart. However, irrespective of that pattern, we all know by now where are key areas of support lie for both metals.
More importantly however is that something caught my eye this evening as it relates to the Gold Bugs Index, (HUI). First the bigger chart. I won’t re-print the annotations on it. (Click on chart to enlarge)
Now let’s zoom in tighter to take a closer look at what has recently transpired in the HUI. If we truly have a breakdown in that index, then significantly lower prices are possible. This will most likely lead the metals down with it.
I’ve saved the biggest chart until last because I feel it has the potential to be the most telling. What follows is the multi-year chart of the HUI. Note that the most severe of all head and shoulder topping patterns occur at the end of a large bull market (up move). As this 10 year chart of the HUI shows, we have broken below the neckline of what is a clearly visible head and shoulders topping pattern.
This correlation between Gold and the HUI is visible in the following performance chart where the aforementioned breakdown out of a massive topping head and shoulders pattern is clearly visible. This chart gives me great pause at what the potential is for gold and silver should they follow the HUI’s breakdown. Odds are ever increasing that the two metals will follow the HUI down given the correlation that the HUI has had to the price of gold over the last 10 years.
With all that said, we are more than ever on the cusp of something big in the price of of gold and silver. While this post is not by any means any recommendation to buy or sell, it is my interpretation of the technical data that I have analyzed of late. If we go back into my gold and silver posts you will see that most of the time, these patterns do play out. This does not mean they will going forward which is why I always recommend if you are trading these set ups that it is always better to miss the initial move but wait for confirmation.
In a nutshell, the following support/resistance levels should be used.
Silver
- A break of $27.41 can be shorted for a move to $26.57.
- If $26.47 fails, stay short for a test of $26.15
- Should $26.15 be taken out to the downside, a significant and rapid fall could ensue
- On the long side, I would go bullish on a convincing break of $28.00 to the upside
Gold
- We have already broken FIB support and look to test $1539.00 at which point I would look to go short if broken
- The next area would be the longer term support at $1520.00.
- If $1520 is taken out, we could see a rapid and violent decline. Persistent selling could see $1300.00 come into the picture.
- To the upside, as I have written about at length recently, $1586 looks to be the first area where we can start to strongly consider going long for a potential move to retest the $1620 area.
- A break of $1620 to the upside could see a significant rally.
These are the levels I will be playing personally. I won’t be calling the trades out. Always use stops on both the short and long side. As opposed to futures, you can use the GLD and SLV to trade using either long or short positions or call and put option positions. Again, I urge you to seek professional advice from licenced brokers as this article represents my views only and is not meant to be any sort of recommendation to buy or sell.
I know this piece offers you a lot of information to consider but at the end of the day it remains quite simple. One leads the other and so on. We have to take into consideration today’s FED minutes that show that there is significant discussion within the FED about the tapering off of easing measures. We must also consider the breakdown of the industrial metals (copper and platinum) as was also discussed on this blog a couple of weeks ago. We also know that despite significant easing worldwide since the crisis began, the price of both gold and silver have stopped their ascent. Major topping patterns were formed in 2011 (May for silver and October for gold) and to date, both metals have stair-stepped down and remain firmly entrenched in downward price channels.
What is more concerning to me of late is that recent rallies have appeared to be more short covering than new buying. This worrisome if you are a staunch bull because the absence of fresh new buying will kill any rally. Short covering rallies only last so long before the broader trend resumes. Any buying that there is occurring is quickly being sold into any rally. The inability for either metal to launch a sustained rally is also concerning given that in silver’s case, we are rapidly approaching the 2 year mark of the blow-off top.
I continue to be of the view that we will see lower prices before we will see the old highs challenged in either metal. To expand on that, those old highs may be further off than many of my readers might want to believe. However, that is my own personal view and while that remains my primary forecast, significant rallies past resistance levels could alter that view. However, people must be prepared to accept that they already witnessed the highs for both metals in 2011 and that they might not witness new highs for many more years to come, especially if my inclination about the bull market in the metals being over turns out to be true.
The last 5 years have served up all the necessary ingredients to make the stories about gold and silver see the light of day. If you still believe all that talk about gold and silver being the only true currencies and the only place to truly safely park your money then ask yourselves why both have been trending down. Despite many false alarms and cries of “wolf”, we haven’t seen a Comex default nor have we seen the collapse of the banking system as we know it. We haven’t see the death of the dollar nor have we seen hyper-inflation or any other of the extreme scenarios used by many in the metals-sphere to promote physical metal ownership. I don’t want to hear any nonsense about price suppression either because the fact of the matter is that anyone trying to supress the price of gold or silver over the last 10 years has failed miserably.
As always, thanks for reading and feel free to comment and leave your own observations and opinions.
