Technical observations of RossClark@shaw.ca
Independent of the geo-political events that are creating underlying volatility and upward pressure in the metals there are also measurable technical events. Technically, we are into a phase of advance that is reminiscent of the precious metals of 1973-74 and 1978-79, the Nikkei of the late 80's and the NASDAQ of the 90's. It is a phase where buying breakouts can work well and overbought conditions can remain in place for extended periods; however the inevitable corrections do occur. The following analysis is meant to assist investors in finding the next lower risk entry opportunities on the long side of the markets.
The gold/silver ratio bottomed on April 19th and then moved in favour of gold for three days. The subsequent consolidation produced a divergence in the ratio. Now gold has rallied to new highs and silver to a tested high producing an uptick in the ratio. Typically (see following table) the gold price tops out 8 to 17 weekdays following the initial bottom in the ratio. May 5th was day 12.
Silver tested and found support at the 34-day exponential moving average on an interday basis on April 21st. This satisfied the normal pattern following upside exhaustion readings. The break also came immediately after the RSI(14) reading over 90, providing a classic 1 to 3 day sharp correction with an RSI(14) reading below 70 as a short term low in price.
Now that the GSR has established a well defined divergence we can narrow the ensuing silver analysis to the six instances related to those events. There is a consistent relationship between the peak in the Relative Strength Index and the time it takes silver to find an important low. The RSI(14) peaked at 90.78 on April 19th and on that basis it should take six to seven weeks to find a bottom from which a sustainable rally is possible. The week of June 5th looks like an optimum point from which to start the next major rally. (Seasonal pressure should also be out of the way by the end of June, with a positive influence through early October.)
From a pricing perspective, a 100-day simple moving average (currently $10.37 and rising at 5 cents per day) is the next support. The worst case scenario will be a test of the 89-week average (currently $8.37 and rising at 13 cents per week).
Technically, we'll ideally see the break become hard enough to generate a reading below -200 in the CCI(20). If so, then a reversal back above -100 in the oscillator will determine that the bottom is in place and provide a conservative means of entry. Risk can then be controlled 2% below the corresponding low.
Each of the six previous occurrences also generated a Sequential Buy Signal or Buy Setup as the correction was coming to a conclusion.
As another means of corroborating a bottom we should look for the mining stocks to show a bullish bias as the base forms.
With all these parameters established it is now a matter of having patience to see if they can fall into place over the coming weeks. Choppy market action followed by a downside cleanout would be the ideal means of putting the maximum number of investors back on the sidelines, thereby creating the buying force to push the price higher once again.
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