Gold/Silver Market Updates
With silver being in a critically overbought state and looking set to react very soon, we now have to "find reasons" for gold to react on its charts, since it is hardly likely that gold will continue higher while silver is reacting. Fortunately, if we look closely enough, it is not hard to find reasons for gold to react soon along with silver.
At first sight everything looks "ship shape and Bristol fashion" on the 1-year gold chart. The fine uptrend continues and it is not showing very obvious signs of being at an overbought extreme. However, if we look more closely, we can see that the RSI indicator at the top of the chart is just starting to move into critically overbought territory, although it can rise to higher levels as the recent past demonstrates. Similarly, the MACD indicator while not at the overbought extremes of recent months, is also not far off. What all this means is that while gold is not at the same kind of overbought extreme as silver, it is not so far off as it first looks. Another factor pointing to a possible reaction soon is that gold is now only about $10 - $15 below the inner channel return line shown on the chart, currently at about $985 - $990, and should it succeed in running to this channel line in coming days it can be expected to trigger selling as the price will be approaching the potent psychological $1000 level, which will automatically bring out a wave of profit taking. Taking all these factors into consideration it is easy to grasp why gold may soon react along with silver. How far might it react in the event that silver reacts back to the $17 - $18 zone? Bearing in mind that it might first run at the channel line in the $985 - $990 area as already mentioned, it could react back to the $900 area, although it is likely to stop and turn up again before this level is reached. In the $900 area we have strong support from earlier trading, the support of the 50-day moving average, and a little below and rising all the time, the underlying support of the intermediate uptrend line, so it is considered unlikely that it would drop below this level. A near-term reaction by both gold and silver would be expected to coincide with a bounce in the dollar which is substantially oversold after its recent breakdown and plunge.
On the long-term 8-year chart it can be seen that although gold can be expected to react short-term along with silver, the intermediate uptrend in force following the breakout above the resistance shown is likely to carry it to the upper steeper channel return line before it has run its course, and given the dollar's recurring bouts of weakness there is a good chance that it will run considerably beyond this as gold's larger uptrend may continue to accelerate against the dollar. However, this trendline may nevertheless serve as a guide to where the intermediate uptrend is likely to top out, especially as we are at a point in the gold/silver cycle where silver really makes the running, as it tends to perform best in the final stages of a gold uptrend. Long-term the trend of both gold and silver remains up, of course.
Over the past week or so we have been seeing the acceleration by silver that we expected following its anticipated breakout against the Euro and the Swiss France. However, coming on top of strong gains since the low last December, this has resulted in an extremely overbought condition developing.
We can avoid confusion and maintain an effective trading strategy with respect to silver at this point by the simple expedient of distinguishing between its short-term and medium-term trend and condition. On the 1-year chart we can clearly see why it has reached an overbought extreme on a short-term basis - the RSI indicator at the top of the chart is well into critically overbought territory, as is the MACD indicator at the bottom of the chart, and a massive gap has opened up between the price and its principal moving averages. Thus, it is reasonable to expect a reaction soon, and given silver's propensity to suddenly crater it could well be swift and savage. Having said that it will probably not take the price below $18, or $17 maximum, for as we shall see, a powerful intermediate uptrend is in force that should take the price to much higher levels before it has run its course.
The long-term 8-year chart is most interesting as it reveals that, having only this year broken out from a massive consolidation pattern dating back to April 2006, silver is still in the early to middle phase of the current intermediate uptrend that promises to drive the price rapidly to the long-term uptrend channel return line now at about $30, so this figure is our target for this advance, on a medium-term basis. The minimum target for the advance is the pale blue return line shown, which gives a somewhat lower objective that will nevertheless involve a very substantial gain from the current price. Note that silver may considerably overshoot the $30 objective, because the uptrend could well accelerate, especially if the dollar burns a hole in the floor.
That the $30 target is a reasonable medium-term objective for silver is made more clear by the 8-year chart for silver plotted in Euros, against which we can see that it is still in the early stages of its new intermediate uptrend. This chart implies that $30 is a conservative target for this advance - which is hardly surprising as the dollar is falling apart.
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Copyright ©2003-2011 CliveMaund. All Rights Reserved.
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