Gold and Silver updates
Targets, Lever 'Boyz' and Danger Zones
23 May, 2005
Since the last update the dollar
has broken out upside from its long-term downtrend and gold has
broken down from its long-term uptrend. However, the situation
remains finely balanced as these breakouts are not yet major,
when viewed on long-term charts, and the dollar on Friday attained
a short-term target stipulated in the last update, and is now
overbought and just beneath a zone of heavy resistance. This
means that any further gains, short-term, will be hard won.
That said, these breakouts are serious developments, and the
risk is that, after consolidation or minor reaction to alleviate
the overbought condition, the dollar continues to forge ahead.
We can see these developments
on the long-term 4 year charts for gold and the dollar, which
for convenient cross reference, are placed together. [For those
with wide monitors there's a better
view here]. The big difference to note when looking at these
charts is that the dollar has already rallied to meet its short-term
target at its adjusted less-steep channel, but gold hasn't,
and would have to drop to the $400 area to meet its target at
the adjusted uptrend line.
In the last update it was stated
that the dollar was being squeezed between its rising 50-day
and falling 200-day moving averages, which were rapidly converging,
and that this would force a decisive breakout before much longer.
This is what happened, and it was a breakout to the upside, which
we can clearly see on the 6-month chart. This was a significant
move that not only blasted the dollar sharply above its 200-day
moving average, but also above an important resistance level.
However, it is certainly not "home and dry" as it is
now considerably overbought and just beneath a much stronger
zone of resistance, shown on the 4-year chart - this means that
the boys who are working the levers via the offshore banks are
going to have their time cut out if they expect to generate much
more upside over the short-term.
Not surprisingly, this dollar
strength caused gold to buckle and break below its long-term
trendline. This breakdown, which still looks marginal on the
long-term chart, looks more serious on the 2-year chart, where
we see that it involved a rather nasty breakdown from the symmetrical
triangle pattern that had formed from early December.
While the continuing support
immediately beneath the current price could yet reverse the current
downtrend, it does now look set to retreat towards trendline
and "round number" support at the $400 level. It is
important to note that should this occur the gold stocks, which
are believed to have largely discounted such a move, are quite
likely to hold the all-important 150 support level on the HUI
index, provided that gold bottoms in the $400 area and does not
break down further towards the next important support in the
$375 area. As already discussed elsewhere, a breakdown by gold
below $400 and subsequent decline to the $375 area, would be
expected to result in a breach of 150 by the HUI index and a
rapid decline to the 100 area.
Silver has actually held up
surprisingly well over the past couple of weeks, given the breakout
by the dollar and the severe breakdown by copper, and the breakdown
by gold, and should the dollar now turn tail and back off, which
is quite likely as it has attained a short-term target
there is the potential for a sharp relief rally.
On the 2-year chart the picture
is pretty much unchanged since the last update. Silver remains
within a large symmetrical triangle which is going to force a
big move, one way or the other, before much longer. The big difference,
and the point to note, is that silver has managed to hold up,
despite Friday's decline, while the dollar has surged to reach
a short-term target. While the risk of a severe breakdown remains,
should the dollar now back off we could see a swift and sharp
relief rally that takes the price out of the immediate danger
zone. To assess the chances of this happening we will now turn
to the 6-month chart to examine recent action in more detail.
The period we need to scrutinize
is the gentle downtrend from the early March peak at about $7.60
to the present. The big question here is whether this pattern
is a flat-bottomed triangle, which is bearish, or a falling wedge,
which is bullish. Unfortunately this is a borderline case, as
the lower trendline does appear to be falling very slightly,
while there is a clear support line at about $6.80 - $6.85. But
whatever the answer to this question, one thing is for sure,
the silver price has been forced into a relatively tight trading
range between various converging trendlines over the past couple
of months, and it and its moving averages are now bunched tightly
together. This is a situation that will force a big move before
Given that the dollar has now
achieved a short-term target, and is overbought just beneath
heavy resistance, it should only make limited further progress
short-term, or consolidate or react. If the latter, silver is
expected to break sharply higher, breaking out of the triangle
shown on the 6-month chart, and advance swiftly towards the $7.90
area. A big move is likely at this time because of the unusual
degree of compression, thus silver is now an attractive candidate
for a "straddle" option trade. It is very important
to note, however, that such a sharp short-term advance will NOT
constitute a breakout from the larger triangle shown on the 2-year
chart, and until that happens the larger trend will remain neutral.
21 May, 2005
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Visit his subscription website at clivemaund.com. [You can subscribe
No responsibility can be accepted for losses that may result as
a consequence of trading on the basis of this analysis.
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