Sunday pre-game 2/12/12

I'm happy with the gold action the past two weeks. We've seen a well-needed consolidation to the bottom of the black trend channel on the weekly chart, which, as I mentioned three weeks ago, was to be expected, since we entered it so suddenly, without resistance. Gold hadn't closed a week *on* the black line since July, and if you note, the weekly closes on that line have presaged every strong, sustained rally on the chart (I recall being concerned that the false breakout in October was based off of a poor consolidation).

On the daily chart over the same period, I have drawn in the "$25 Yellow Zone" again, a buffer for all corrections until (what is looking like) the Great Bear Trap of December 2011. Note, we finished right on the upper boundary, after bouncing off the 144-day MA (pink) yet again, which divides the buffer zone in half. I'm bullish from here. Maybe the RSI will fall to the 50 level again, but I'd be a big buyer at that point.

The HUI also looks like it has a lot more upside than downside here. Note that only a 2.5% drop from here will take the HUI to the important intersection of the white line with the $510 horizontal level (which marked the important December 2009 top). I have my dry powder ready if that happens.

Let's return to silver, where, even more than gold, we're going to find out soon enough if the awful action of December 2011 was an anomaly/bear trap. We cleared the purple dotted line a few weeks ago, and it's been effective support since. Let's see if it can hold.

Everybody who follows silver is familiar with the wide downward channel that began with the -35% May 1 Massacre, the top of which we haven't tested since the -40% September Massacre. Though I don't usually look at non-log charts, it appears a lot of people do, and the top of the post-May downtrend channel (purple) is now passing the important $36 level, where it looks like it wants to be hit harder than a cougar who just snorted several lines of coke and poured a bottle of liquid cialis into your vodka martini while you were taking a piss. Granted, around the silver blogosphere there's a lot of talk about JPM shorting silver like crazy, which surely is not a good sign, but I still think the top purple line has to be tested sooner rather than later, because frankly, it seems to me the bottom of the downward channel (red), or even the downward wedge (orange) is no longer in play, on account of so many strong points of support along the way (see grey lines for examples). An obsolete chart formation should be tested on the upside, and resistance should become support. Or so that's what I learned during years of grueling study getting my degree in Chart Science at the University of Phoenix.

On this familiar chart of daily closes, perhaps we'll hit the solid green line first, which I've been waiting for to expand my trading position.

Traders of AGQ (which I generally am not) might find the $54 level enticing:

Another reason to be bullish: the 10 year yield measured in silver hit the purple channel again last week, and bounced off Friday when yields fell 3%.

Here is a magnified view with only daily closes:

Finally, just as I view the past two weeks consolidation in gold and silver healthy, the gold:silver ratio chart also shows that it was falling a little too fast, and now is more in line with the slope of the big move that started in August 2010 (see parallel green dotted lines):

4 comments: said...

I think Gold will end the year at around 2,100 and silver will be in the 45 range. I think QE will boost the price of all risk assets, and even promote upside in more nontraditional sectors such as farmland investment.

Warren James said...

Such a good set of charts, and the first comment was a spam comment!? (I left it there because it constitutes an opinion about the market - in that sense the spam design worked, but just wanted to highlight it since I was ranting the other day about comments spam, this is a good example of how it works).

That UST:Silver chart is the best one, imo. btw, regarding the recent gold price, I saw an interesting observation (by NickelSaver) which matched the shape of the recent surge - to the classic bubble graph. He suggested that this looked like a classic mini-bubble in the gold contract price. Interesting (link). Oops, look at the time..

Duff said...

Any thoughts on whether or not PMs can withstand an S&P correction? Seems we are way past due to see a decent size drop. BTW, beautiful charts:>

Warren James said...

Duff, where'd you get your 50% S&P drop concept from? Are you responding to the recent CNBC feature? One gets the feeling that there is a social media campaign in operation (get ready to go long S&P500).