Saturday, March 10, 2012

Two sides to every coin

Is it just me or has it been a LONG week?  I'll make things rather brief so we can cover the technicals, in what is my probably my first post in about 3 months.  After reaching just shy of 1800 a little over a week ago, the powers that be decided to play around with gold smashing it $100 in one day.  From there the bears got the short term momentum on their sides and an ugly chart to paint some more.  Gold fell an additional $20 from its spike low to hit $1666, and ended the week with a bit of a bounce that has maintained above the 200 day MA.    Now, I have seen a lot of people shouting "inverse head and shoulders" on the gold chart because of this and they may be right, I am certainly not saying they aren't in fact I hope they are, but a lot of times people tend to see what they want to see in charts and it's important we get both sides to the coin in order to make a fair assessment at whats likely to happen and to not be completely caught off guard in the event that chart pattern we saw doesn't pan out.  Lets start by looking at the head and shoulders that is at least for the moment, appearing on the daily gold chart.

We can see where the right shoulder is forming if this were to keep this pattern.  So far it will have a low on the right shoulder that is higher than the low on the left, which is text book for a inverse head and shoulders, and speaks of the psychology behind the market.  As I have said a thousand times, psychology makes these chart formations.  The significance of the right shoulder having a low higher than the left isn't just a coincidence or some crazy idea a bunch of chart guys came up with that has been generally accepted over the years.  The significance is this: it shows a move downwards on the left shoulder, than a rise to a resistance point (which for this is currently 1800).  Then there is a deeper move lower for the head followed by a rise to the same resistance point.  Finally, there is one more attempt by the bears to move things lower which ends in a higher low than the first move and a rally to the resistance point that, if all goes well should break and lead to higher prices.  The psychology is that people are thinking 1800 is a good selling point, that is obvious from this picture, but as moves downward continue, people are less willing to wait for prices to dip further to come in and buy.  They are obviously seeing a good amount of value in gold near the 1700 mark, unlike previous dips.  The growing enthusiasm to buy is what will take out the 1800 mark.  That is the psychology behind why this chart formation is significant.

Ok, so lets say this pattern holds, what's our game plan then?  Well, ideally we will consolidate in this area for a bit before trying to establish a trend higher that will take us back to 1800 that should now break. There is not much standing in our way after that other than the all time high, but we should keep our eyes open to see if resistance develops at the 1850 area, as that does coincide with a Fibonacci level.  So as we consolidate, this would be a good time to buy.  Assuming however that this is the chart that is the be all and end all and will dictate further price action.  Lets move on to another chart with a different outlook.

Ok, so above is the weekly gold chart with the trend lines that have kept price in check from highs to lows for about 3 years, until it broke above the upper trend line and rocketed to 1900.  After an initial sharp decline and a bounce, gold found a low at 1521, amazingly right at the trend line that previously marked lows.  Coincidence?  Sure, if you believe in them.  Gold then rallied up to nearly 1800 a week ago and then got smashed back by $100 in a day.  Where is 1800 located currently?  Right at the upper trend line.  That's already too many coincidences for me.  So, are the previous trend lines back in play?  Are the powers that be trying to enforce them in order to keep prices at bay for a bit?  Regardless, this picture would more likely spell out a test of the lower trendline after just failing at the upper one, which could send us down to 1600.  RSI is anemic, but that doesn't mean it can't go lower, and MACD after having a bullish cross over a couple weeks ago is flat lined waiting for some direction either way.

So what's the game plan here?  Well, you'd want to wait till closer to 1600 before really loading up, and you can then expect resistance later this year at our previous all time high around 1900.  Depending on timing, we could see 2000 this year and still stay in these trendlines.

So which one is right?  Probably a combination of the two, but in case our one scenario doesn't play out, we have a second picture to look at to see if that is the one that is dictating price action. Point is, don't buy like crazy here thinking that 1600 is impossible, it's not and you could get burned badly.  Likewise, don't sell all your gold expecting to buy it back at 1600, you might not get it.  Being comfortably long here is a good strategy.  Ok, onward to silver.

Silver is a mixed bag,  MACD crossed over on the weekly chart, and is at a similar depth to where it was at the 2008 low, but is now fizzling a bit.  The break of our downtrend line was quickly fought, pushing us back into our wedge.  Could price fall as low $26?  The chart seems to say it could, but it is unlikely.  Even a move downward in gold to that 1600 mark where our trendline is would likely still not result in $26 silver.  A low near $30 is more likely, but then again never rule it out.  The daily chart which I am not going to include is similar to gold's.  There is an inverse head and shoulders of sorts, even though it looks like some one hit it with a lead pipe a bit.  Obviously the psychology is the same for the two, but silver's #1 priority is breaking this trendline and holding above it for a bit to keep it from being painted again.

Below I will include the $HUI because I usually do, but I am going to try and write a bit about some individual stocks in another post if I have some time, because looking at just an index weighted mostly in Goldcorp and Barrick doesn't nearly tell the story of whats going on in the gold stock world.  

There really is not much to get excited about looking at this picture, although to be a bit more rosy, I'd like to point out that over the last 10 years or so, MACD has typically found a bottom at the 0 level to the -10 level with 2008 being  the only exception. We are currently at -8 which makes me think it would be impossible to see this floor break at 500 when we have 1700 gold.  I also would like to point out that if nothing else, buying near 500 and selling near 600 has generated you a trading profit of 20% which is nothing to sneeze at.  If that's all you do your doing ok on the miners.  Yes, we all know that eventually that cap at 600 will break and miners will go insanely higher which would be nice, but even if you sell at 600 and then it breaks, it only takes a minute to buy it back and you'll only miss out on a small profit in the grand scheme of things.

Ok that's all for the metals and the mining index.  Hopefully soon I will have something more detailed on some really awesome miners that  have tons of potential that will make Goldcorp look as exciting as a root canal.

Good luck and be careful out there everyone.

-Jonathan M Mergott

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