Gold and Silver updates
odds favour a correction
22 February, 2005
While gold did not become anywhere near as overbought as silver
on its mid-month run-up, the odds favour a short-term correction
from here. There are several factors that taken together make
this likely. Looking at the 6-month chart we can see the strong
advance in the middle of the month, comprised of 3 white candles,
but following this the advance has slowed right down, and several
"doji" candles have formed. This type of candle frequently
signals a reversal, particularly when, as is the case here, other
technical factors concur in signalling the likelihood of a downturn.
These other factors are that the price has stalled right at the
resistance at the highs of much of last month's trading range,
and, coincidentally, right at the resistance at the falling 50-day
moving average, both of which increase the likelihood of a short-term
Otherwise the picture is quite
bright, with gold having taken off nicely from support at its
long-term trendline, breaking the downtrend in force since December
in the process. As already mentioned it is not seriously overbought,
so after a short-term reaction, probably back to support in the
$420 area, it is likely to pick up again.
The dollar has dipped back into an area of support above its
50-day moving average, from which a short-term bounce back up
towards the 85 area is likely, which fits the outlook
Although silver could
spike higher towards $8 from here, the odds favour a reaction
short-term, not merely because of the outlook for gold and the
dollar, but for its own reasons as well. Although the price continued
incrementally higher last week, it has clearly been running into
resistance towards $7.50 and upside momentum has waned. The RSI
indicator is now at a normal overbought extreme, and the MACD
indicator is approaching its normal overbought extreme. After
the sharp rise earlier in the month it would be reasonable for
the price to react back somewhat from the current overbought
level, towards support in the $7.10 area, which would allow the
short-term overbought condition to unwind and the moving averages
to move into a more bullish alignment.
Otherwise, the sharp advance in the middle of the month augers
well for continued progress after an expected short-term reaction.
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany.
Visit his subscription website at clivemaund.com.[You can subscribe
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as a consequence of trading on the basis of this analysis.
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