Gold and Silver Market Updates

Clive Maund
Dec 19. 2005

Gold

Gold has displayed classic technical action over the past couple of weeks, with the breakout above $500 being followed by a ramp that took the price to an overbought extreme. In the last update a return trendline was delineated on the 5-year chart, and it was mentioned as a possibility that the price might stage a "throwover" breakout above this trendline, which would signify a reversal, and this is what happened. Last Monday the price rocketed higher in the early trade but closed little changed, back down at the day's low. This was a classic reversal day and a clear warning for traders to get out. A severe reaction ensued immediately. However, by the end of last week, the "shoe was on the other foot" with the price probing support towards its 50-day moving average and closing well up from the day's lows, suggesting that, near-term at least, the selling has been overdone and that a rally is likely next week.

The question now of course is to determine the significance of last week's dramatic retreat. One commentator was busy writing gold's epitaph, calling last week's action "gold's final blowoff top", others believe it has presented a buying opportunity, and expect gold's advance to resume soon, if not immediately. The truth, however, is probably somewhere in between, for reasons we will now consider.

On the 6-month chart we can see the strong advance by gold following the mid-November breakout above the September - November consolidation pattern. This advance eventually resulted in an extremely overbought condition, shown by the RSI and MACD indicators and various other short-term oscillators, and by the huge gap between the price and its moving averages, and between the moving averages themselves, so that the chart was screaming "sell!" when gold made a classic "Reversal Day" candlestick last Monday.

On the 5-year chart we can clearly see why gold's advance halted and abruptly reversed where it did. Gold had risen rapidly to reach the upper return line of the currently operative long-term uptrend channel, so that on its arrival there it was already extremely overbought. It then had the audacity to attempt to break out above this channel, and its failure to do so resulted in an abrupt change of sentiment as traders suddenly raced to lock in big profits.

So, what now? Last Monday's Reversal Day is believed to signal an end to the intermediate uptrend that began not in November, but back in September, when gold broke out of its 10-month long consolidation pattern. This is because the move terminated at the upper return line of the long-term uptrend channel. It is therefore logical to expect a lengthy period of consolidation/reaction before a serious advance can resume. Any reaction is expected to be limited by the strong support that exists at and above the September - November congestion area, with major support from the 10-month trading range coming in at and below $460. The probability of gold breaking decisively above the top channel line, which would lead to a spectacular advance, is rated as highly unlikely over the short to intermediate-term. This kind of action is more the province of penny stocks.

Gold's long-term uptrend remains unbroken and its 200-day moving average continues to rise steadily, so although an intermediate top has been signalled by the action of the past week, a long-term top has not. Therefore, any reaction back to support in the vicinity of the long-term trendline and the 200-day moving average will be viewed, as usual, as a buying opportunity, both in gold and gold stocks.

On a short-term basis a rally is likely following the plunge last week, as pointed out at the outset, as gold has reacted back into support and Friday's action was positive.

Silver

Silver's action in recent times has quite closely paralleled that of gold and so much of what has been written in the Gold Market update can be taken to apply to silver, except, obviously, prices and support levels. Silver staged a reversal day last Monday after becoming very overbought, similar to that in gold, and then went on to react sharply, although by Wednesday - Thursday it was already stabilizing above support at the April 04 highs in the $8.40 area, which it had earlier succeeded in breaking above by a significant margin.

The Reversal Day last Monday is believed to signal an end to the intermediate uptrend that began in September, and if so, a lengthy period of consolidation/reaction is to be expected, mirroring the situation in gold. Although a short-term rally is to be expected next week following last week's plunge, it is considered unlikely that it will get very far, after which renewed decline it to be expected. It should be noted that if silver drops back into pattern, by breaking back below the April 04 high at about $8.40, and perhaps heads for support in the $8 area, it will not negate the overall bullish pattern.

Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

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