What's next?

Alright, well we've been waiting for a strong move one way or the other, and it looks like we got it today. But this is looking like a washout to me here. For one thing, both gold and silver have RSI's at 30, and miners are trading at absurdly low historical levels relative to bullion.

I don't see an immediate recovery, but I don't see a lot of downside either, and if we fall another 3-5% or so I'm looking to buy calls. 

In gold, let's go back to a multi-decade long term weekly chart. We see that, although this bull market "officially" is thought to have started in 2001, it wasn't until 2004 that the $415 level was touched again. That level had been struck several times in the 1990's, so it really was nothing special. Then, half of 2005 was a long consolidation culminating in a "triple bottom" at $415 (circled). I've drawn a conservative blue trend line starting there, that was only broken in 2008. My wager is that that blue trend line will only be broken if there's a real 2008-type scenario repeat, where the financial system is believed to be on the verge of collapsing (assuming gold this time doesn't pick up the safe haven bids right away). I'm betting 2008 isn't happening here (on the contrary, how many of these "eurozone will collapse" scares have we had?), which is why I'm thinking this is just the last stages of a big and protracted washout since the $1900 peak. I think we move more or less sideways to the blue line, or the 89-week moving average (black, dotted) right below it. (Funny how the best fits often seem to be Fibonacci numbers.) Check how the 89-week MA has also only been violated in 2008, going all the way to the rounded bottom in 2001.

 Then we have the 21-month MA (another Fibonacci number, green) which I spoke about on Sunday. It's at $1560.

 So I'm thinking the $1550-$1570 range is a good buying opportunity, which is only 3-4% from here. Assume silver has greater downside, and $27.50 is looking good for silver, suggested also by this chart:

 I drew the bottom of the (perfectly) parallel downward channel since April 2011 as a dotted line, because I don't think it's in play: too many strong levels of support would have to be violated. The ~$22 level, where the dotted bottom of the descending wedge hits a long term trend line sometime this year, however, is a nontrivial possibility, I suppose.

I should also add that it's not *impossible* the bottom is in today. Evidence for that is the gold silver ratio:

As well as the 3 year silver weekly chart:


GM Jenkins said...

I see that Jesse's Cafe Americain has exactly the same read on the situation that I have here: http://jessescrossroadscafe.blogspot.com/2012/05/gold-daily-and-silver-weekly-chart.html

He also adduced the premium to NAV of CEF and Sprott's funds, which is more significant than the miners at all time lows relative to bullion (that could be based on other stuff, like fear of nationalization, as Victor has been pointing out lately.)

Kid Dynamite has called Jesse "an idiot impersonating a trader" so that makes two of us I guess :P

Idiot or no, Jesse had by far the best zinger against Munger's quip that gold was for the uncivilized:

"Let them buy railroads"

Warren James said...

Ouch. I will get on the phone to Mr Bernanke immediately to rectify the situation.

Louis Cypher said...

@ Warren
I have left about 3 messages with that guy. I think he is avoiding me. I told his secretary he might find an Aye-Aye's head in his bed when he wakes up.

I follow this guys stuff off and on. Worth a look as he checks out the 300 DMA

Dr Durden said...

Thanks for the update, GM. Was watching the VIX today and it didn't give an upper BB peak-a-boo like I thought it would. So it seems to me this is more of a "fine I'll dump a little more" than a "holy shit, get out!" type of situation.

Silver weekly: red 12 of the last 15. Go back as far as you can, and you won't count that many in a row. Nice controlled bleed out.

Edwardo said...

I have my reservations about gold stocks, but, having said that, I've had my eye on GDX, specifically the .50 retrace from its highs. It came very close to hitting it today and has bounced hard. In short, we have the potential for an important low in place.

GM Jenkins said...

I'm betting on a nice bounce to close the week, but I expect that the correction will continue for the rest of the month (take a look at, e.g. the 50-period "CCI" indicator option for gold on stockcharts.com; we're right at an all time low at -210, but the other 6 times that's happened over the past decade, there was a quick little bounce up, and then one more fall before an explosion up). At that point, mining stocks would look really good, especially if a 5-10% stock market sell off happens as well. The 377-day MA is also worth checking out... a dozen or so big bounces spread out over the past decade, including today, and only broken for a short period in 2008. It's turning over, and I expect it to be hit again before this correction is over.

GM Jenkins said...


Edwardo said...

GM, FWIW, the estimable Terry Laundry's TTheory has the low for gold's correction (now in its eighth month) coming in late June. The price, as per his work, is somewhere in the mid 1400s with a worst case scenario in the low 1300s. I think how far today's rally can carry will have a lot to say about the odds of the worst case scenario unfolding.

If the profile of the '08 retrace has anything to say about the present action, this correction is getting long in the tooth.