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Major buy alert

Clive Maund
21 June, 2004

The prospects for gold and silver stocks are better than they have been for the past 10 months. Gold's strong move on Friday above its 50-day moving average signalled that its 6-month corrective phase is almost complete, and that it is now very unlikely to break down from its long-term uptrend channel and that it should start to move ahead strongly soon.

Silver appears to be shaping up for a strong advance too. It is close to completing a symmetrical triangle base and looks set to power above its 50-day moving average. Everything seems to be coming together to support a strong advance shortly. The US dollar, having broken down from its bearish rising wedge, looks set to fall. The prospect of rising US interest rates was the carrot that encouraged the bear market rally in the dollar from last February, but the increased rates are priced in, and will not serve to support the dollar, because with rising inflation real rates will remain negative and, in any case, other countries can be expected to raise rates too - and they've got a head start.

On the 3-year gold chart we can see the fine long-term uptrend, and the positive action late last week, with gold breaking above the steeply falling 50-day moving average for the first time in over 2 months, greatly increasing the chances that the long-term uptrend will hold, and signalling that we are very near to completion of an intermediate base area below the resistance at $400. It is interesting to note that the duration of the correction from the January peak, approaching 6 months, is almost the same as the ascending triangle correction that followed the February 03 peak. This time symmetry is not surprising, given that the correction brought the price down to touch the long-term trendline. The only circumstance that would justify a shift back to an intermediate bearish outlook for gold would be a break of the long-term uptrend line.

The gold share market did not appear to fully grasp the significance of the move in gold on Friday, and staged only a modest advance. However, the HUI index is well placed to break strongly above its 50-day moving average and should do so over the next week or so. There is considerable resistance in the 210 - 250 area on the HUI arising from the large trading range that developed between October and April, but the effects of this are expected to be mitigated by a substantial improvement in sentiment as gold moves higher.

On the 6-month silver chart we can see how the price has been held down at a low level due to the huge damage to sentiment caused by the April collapse. However, sentiment is steadily recovering from that trauma, and what appears to be a symmetrical triangle base looks to be close to completion. From the point of view of timing it is important to observe the interplay of the 50 and 200-day moving averages. Note how this base area has formed in the vicinity of the still rising 200-day moving average, implying that the April plunge, although dramatic and severe, was a correction within a larger uptrend. Observe also how the price has remained suppressed until the 50-day moving average has had time to come down close to it. Silver is now in position to break sharply higher with gold and we are quite likely to see a strong move above the 50-day moving average towards $6.50 that synchronises with a gold break above $400.

Readers may recall that I had highlighted potential Head-and-Shoulders tops in a range of big silver stocks a couple of weeks ago. I have since examined the charts of these stocks in more detail and cannot find bearish volume patterns to support this idea, I am happy to say.

The dollar chart looks decidedly negative, with the index having broken down from a bearish rising wedge that took it up to the falling 200-day moving average. The larger downtrend appears to be reasserting itself and we can expect new lows in due course.

Descriptions of some promising stocks follow for subscribers, which includes some of the stocks listed in the "Time to Buy" article that went up on the 19th May. That list remains valid.

[You can subscribe here].

20 Jun, 2004
Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets.

Visit his website at clivemaund.com

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © CliveMaund 2004. All Rights Reserved.
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