Gold,
Silver, HUI Technicals
Adam Hamilton
Archives
Apr 18, 2008
After an exceptionally turbulent month in the precious-metals
complex, many traders are trying to make sense out of all the
chaos. Did the recent violent retreats in gold, silver, and the
HUI gold-stock index likely mark the ends of their respective
uplegs? Or do these strong uplegs probably remain intact?
Obviously this question is
crucial as the prudent tactical trading strategy going forward
varies radically based on its answer. If these PM uplegs have
given up their ghosts, then it makes sense for traders to unload
their remaining long positions and maybe even get short. But
if these PM uplegs persist, then the gains to come will still
be reaped on the long side.
As mere mortals, none of us
can see the future. So only time will solve this conundrum with
certainty. But as speculators, we have to game the probabilities
now before the outcome is clear. Technical analysis, analyzing
the PM price charts, is one tool that can help put all the recent
volatility into perspective. Seeing a lot of trading days' results
in context offers a valuable read on the odds going forward.
Often technical analysis is
viewed with suspicion, like some form of superstitious divination.
But it does have great merits. Charts offer perspectives on trends
that are not apparent by just watching one trading day at a time.
Market prices are the aggregate result of all buying and selling
decisions for an asset, regardless of the motives behind them.
So theoretically, charted prices reflect all available information.
But even if you still think
technical analysis is like slaughtering chickens and "interpreting"
the resulting bloody mess, realize that the majority of traders
believe it is valid and useful. In the financial markets, often
popular belief becomes reality. If a significant fraction of
the capital trading any asset believes a certain chart level
is important, and it enters or exits the asset accordingly, it
becomes a self-fulfilling prophecy.
To make a crass analogy, if
a suicide bomber kills you it really doesn't matter whether you
share his faith or not. Your own beliefs are irrelevant. If he
is willing to act on his beliefs in a way that affects you, then
you better learn about his beliefs. Technical analysis is similar.
If many market participants believe in trend lines, and their
trades affect the prices of your trades, then you have to pay
attention to charts.
Thus these gold, silver, and
HUI technical charts offer insights valuable to all traders.
They are all upleg-to-date charts, running from a month before
the mid-August births of these uplegs to today. Prices, moving
averages, and standard-deviation bands are tied to the right
axes. Relative prices, or prices as multiples of their 200-day
moving averages, are rendered in red on the left axes.
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
Apr 18, 2008
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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