July 18, 2019
From the bottom in December 2015 until the break of 1377 last month, Gold was trading in a choppy range with no discernable trend other than the major lows were rising: 1045, 1124, 1167. In such markets, indicators such as technicals (RSI, MACDs, divergences), sentiment, and positioning (“TSP”) are at their best in terms of their accuracy in calling the peaks and troughs.
But when a market establishes a strong trend in one direction or the other, that trend takes over: higher highs follow higher lows in an uptrend, as we saw from 2001 to 2011. Lower lows follow lower highs in a downtrend, such as that from 2011 to 2015. During those periods, data such as TSP can still aid in determining short-term peaks and troughs but are less influential relative to the overall trend and are often ignored. We are seeing that to some extent now.
Gold is extreme overbought, extreme bullish, with the Banks near or already record short, and yet it continues to rise, gold miners even more so. Given that miners are a high beta play on the metals, they tend to overshoot on the upside and the downside, so this is no surprise. TSP can continue to be ignored as the market trends higher (or lower). The key is to follow the trend until it ends and changes in the opposite direction, as it did for Gold in 2001, 2011, and in 2015.
The first sign of a change in trend to the downside is a lower low, followed by a lower high, or a lower high, followed by a lower low. Another less timely but more conservative method would be to watch for short-term moving averages to cross long-term moving averages one way or the other. For example, when the 50-day moving average crosses above the 200-day moving average, that is a positive sign that the trend has changed to the upside. Vice-versa for a break of the 200-day moving average to the downside.
Assuming that the trend in metals and miners continues, the following are the current support levels to watch for a potential change in trend coupled with the short-term and long-term moving averages.
The first sign of trouble would be a break of 1400, just below the lows over the past several days. A break of 1385, the low on July 1, would signal a lower low is in place. If this were followed by a lower high and another lower low, then the trend has changed to the downside.
At the moment, we know that the trend is up as we are seeing higher highs and higher lows, but also because the 20-day moving average is above the 50-day which is above the 100-day and that’s above the 200-day also and they’re all trending higher. The first sign of potential trouble would be the 20-day moving average breaking the 50-day moving average.
All of the moving averages are trending higher which is clearly bullish. In fact, the 20-day may be running a little too far ahead of the 50-day at this point.
Former resistance when broken becomes support. 26.30 was resistance for some time and so 26.20 is likely support on the downside. This is followed closely by 26.00. A break of these levels would be an early warning sign. A break of the prior low at 25.70 would be more worrisome whereas a drop below 24.50 would be a definitive lower low and signal a change in trend and potentially much further downside.
You would now have to go all the way back to former resistance, now support, at 36 and a break there to signal a possible change in trend to the downside. A drop below 33 would be even more definitive.
For those of you who don’t know what a wave 3 rally looks like, here is one of the best examples I have ever seen:
Spiking straight up, gapping higher from one day to the next, it looks like a rocket that has been launched into space. Even though the moving averages remain mixed, it won’t take long for them to look like those in Gold. It would take a dump to below former resistance at 14.50 in SLV, 15.50 in Silver, to even consider a change in trend.
Similar picture here to that in Silver. We would need a break of 27.40 to raise the risk of a trend reversal but we would need to see a decline below 25.75 before it could be seriously considered.
My favorite trading vehicle in the metals and miners space, it has risen 46% in just over 6 weeks! It just surpassed the high of 9.80 back on February 20, a higher high, confirming that we’re in a new bull market, and may be overdue for a pullback soon.
Although the longer-term moving averages have yet to catch up to the spike higher in prices, the 20-day has sliced through them all and they’re all turning up now.
In order to even consider a change in trend, we would need a break of 9.00 and, more importantly, a move below the 200-day moving average at 8.33, currently, followed by a lower high and lower low.
GOLD:SILVER RATIO (“GSR”)
This is a perfect example of why sentiment is critical in a market filled with emotion, perhaps more than any other market out there, the Gold and Silver markets. The GSR spiked to historic highs recently above 95. Then the “price chasers” piled on. Everyone and their dog seemed to jump on the notion that this would just keep going higher, that Gold would continue to excel while Silver lagged. Most cited the industrial usage of Silver as a hindrance given the global economic slowdown to justify their views. On the contrary, it was more akin to a stretched elastic band, more likely to fall than rise further. The rest is history:
While the moving averages haven’t even begun to catch up to the drop in the GSR, the ratio has taken out multiple lows on the downside, most notable being 91.40 (July 10), 90.97 (July 2), and the biggest, 87.87 on June 20. While there may be some retracement to the upside in the short-term, especially given the extremity of the move down, the trend is down unless we set a new higher high >95.
Silver will continue to outperform Gold over the medium and long term, IMHO, and as long as we are in a bull market, Silver miners, especially the juniors such as SILJ, will outperform them all IMHO.
While the trend is indeed your friend, nothing goes up or down in a straight line forever. There will be reversals along the way and nothing of what I just shared here negates the risk of pullbacks in the short-term, potentially significant ones. But as long as we are seeing higher highs and higher lows, the trend remains up in both metals and miners, and this continues to be a buy-the-dips market.
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