Have Gold and Silver Turned the Corner?

02/08/2011 3:40 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

The $18+ rally in the April Comex gold futures and the 80-cent move in the March Comex Silver futures on the back of the Chinese rate hike are impressive. The question is, however, does this mean that the correction in the metals is over? In an earlier article published late last month (see Gold and Silver: How Low Will They Go?), I continued my discussion of the correction in the metals and noted some key levels to watch on the expected rally. Has anything changed?

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Chart Analysis: The daily chart of the SPDR Gold Trust (GLD) shows the rally from just under $128 to above $133.

    • The 50% retracement resistance at $133.26 is being challenged today with the 61.8% target at $135.05

 

    • Volume has been weak on the rally so far and the daily on-balance volume (OBV) is just testing its weighted moving average (WMA)

 

    • The weekly OBV is still acting very weak

 

  • Initial support is at $131.25 with more important support at $129.25

The rally in the iShares Silver Trust (SLV) has been much stronger, but silver is clearly the more volatile of the metals. In the old days, it was referred to as “poor man’s gold.”

    • The 61.8% retracement resistance at has already been exceeded with the 78.6% resistance at $29.49 now being challenged

 

    • The remaining chart resistance is in the $29.90 to $30.44 area

 

    • On an upside breakout, there are targets at $31.75

 

    • Volume in SLV has also been unimpressive

 

    • The daily OBV is positive, but the weekly OBV is still below resistance

 

  • The first real level of support is at $27.34-$28.00 

What It Means:  For gold futures, GLD, and Market Vectors Gold Miners ETF (GDX), this still looks like a rally within a correction that should terminate in the next week or so. This would set the stage for a test of the recent lows. The case of SLV is different, as new rally highs are possible, yet they are unlikely to be confirmed unless the volume picks up substantially. Another new high, one that was not technically confirmed, would increase the odds of a deeper correction.

How to Profit: As mentioned previously, “A close in GLD above $136.30 on volume of over 30 million shares would be a sign that the correction was over. For SLV, it would take a close above $29.05, and for GDX, it would require a close above $61.20 and high volume on both to confirm the price action.”

We may get that close in SLV today, but not on heavy volume. As per an earlier recommendation, I suggested hedging long positions in GLD by selling calls against holdings in the ETF. We rolled over into the March 130 calls at around $4.15 and they are currently at about $4.40. I would buy these back if there is a daily close above $136.05. We made a few points on the earlier hedge and are still up overall. We have no position in either SLV or GDX. GDX is acting weaker, currently trading around $57.37, and the anemic rebound is consistent with a failing rally.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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