The moves forecasted by the COT signals make them very adaptable to commodity based ETFs, writes And...
Two Paths for Precious Metals
12/05/2012 10:40 am EST
Precious metals have enjoyed multi-year bullish trends, which made last week’s shakeout unnerving for some. MoneyShow’s Tom Aspray examines the charts and offers advice on your next moves.
The tone in the precious metal markets has changed in the past week as increasing volume suggests the sellers may now be taking charge. The first sharp drop came on November 28 when over 480,000 contracts changed hands as gold lost 2%. This reversed some of the positive momentum from the previous Friday when the February gold futures closed at their highest level since mid-October.
Another wave of selling hit the futures early Tuesday morning when global trading was extremely thin. The futures lost $10 in a minute and over 3,000 contracts traded at 12:47 AM ET as the February futures contract cracked the $1,700 level.
This occurred when even the US and European traders were mostly absent. Another wave of selling hit the market as the US market opened Tuesday with the February contract dropping 1.5% to close at $1,695.80.
Some are assuming that Tuesday’s drop was tied to a large bearish option trade last week and those buyers picked a particularly thin period of trading to move the markets in their favor. Others think that the selling was tied to fears over the fiscal cliff as traders took profits now to avoid what may be higher taxes on their profits next year.
Whatever the reasons, the high-volume selling needs to be respected as it increases the chances that gold and silver will test, if not break, below their November lows. A technical look at gold, silver, and the silver mining stocks outlines the two most likely paths for the metals this month.
Chart Analysis: The close Tuesday in the gold futures was below the last two swing lows at $1,707 basis the February contract. This now represents the first level of resistance, and it has been tested early Wednesday.
- There is more formidable resistance in the $1,716 to $1,725 area, and it would take a close above $1,734 to turn the daily momentum positive.
- The next key support from early November is at $1,674.70.
- There is further converging support, lines a and b, in the $1,645-$1,650 area.
- Looking at the decline from the early October high to the November low, an equal decline from the late November highs has an equality target at $1,631.80 basis the February contract and $1,629.40 basis the continuous contract.
- The OBV broke its short-term downtrend in early November, line c, suggesting that the correction was over.
- The heavy volume on November 28 caused the OBV to reverse and drop back below its WMA.
- Now the November lows in the OBV have also been broken with next long-term support at line d.
The Spyder Gold Trust (SPY) closed at $169.61 on November 23, which was just above the 61.8% Fibonacci retracement resistance from the October highs. Two days later GLD gapped below its 20-day EMA and it gapped lower again on Tuesday.
- GLD had a low in November of $162.15 with the 50% retracement support at $161.30.
- The daily uptrend, line e, is at $159 with the 100% or equality target at $158.24.
- This corresponds nicely with the major 61.8% retracement support at $158.24 and the monthly pivot level at $158.41.
- The daily OBV dropped below its WMA last week, and it has closed on the support, line g, from the November lows.
- The next major OBV support is at the uptrend, line h.
- The weekly OBV (not shown) is below its WMA but still above its long-term uptrend.
- There is initial resistance at $165.18 to $165.38 and then at $166.
NEXT PAGE: Is the Shine Off Silver Now?|pagebreak|
The iShares Silver Trust (SLV) peaked last week at $33.31 and made a high in early October at $34.08. This was very close to the major 38.2% Fibonacci retracement resistance at $34.11 that goes back to the 2011 high.
- SLV also gapped lower Tuesday with the next weekly support in the $31.07 area and the 20-week EMA.
- There is more important support at $29.84 and the early November lows.
- The weekly uptrend, line a, is much lower at $26.70.
- The weekly downtrend in the OBV, line b, was broken in August.
- The weekly OBV has failed to move above its WMA on the recent rally.
- The daily OBV (not shown) is below its WMA and is testing its uptrend.
- There is initial resistance now at $32.20-$32.50 with stronger above $33.
The Global X Silver Miners (SIL) dropped back to test its flat 200-day MA in November, and it is now at $21.45. The 50% Fibonacci retracement support from the July low of $16.85 is at $21.10.
- The more important 61.8% retracement support stands at $20.10.
- SIL closed higher Tuesday and the volume did pick up.
- The daily OBV is still well below its WMA while the weekly OBV closed below its WMA last week.
- The weekly OBV (not shown) was very strong on the rally from the July lows as it moved to new highs for the year.
- There is minor resistance now at $23.30 with stronger just above $24.
What It Means: Though it is possible that gold’s recent drop is just a false break, the technical action makes a further decline the most likely scenario or path in the weeks ahead. Gold and the gold ETFs are likely to test and probably break the November lows.
The second likely path for GLD and SLV is that they will not decline much further over the near term and then resume their uptrend in the next week or so. The major trend for gold is still positive, so a deeper correction should be followed by higher prices in 2013.
So what is an investor or trader to do? Though a 1-2 day bounce is possible, the recent failed buy signals should not be ignored as they favor a further decline. Therefore now is the time to take some profits on original longs and use recently tightened stops on the remaining position. Those who bought later should limit their exposure now.
How to Profit: See below for managing your positions.
Portfolio Update: For investors 50% long the SPDR Gold Trust (GLD) at $152.42 and 50% long at $150.28, close out half the position now, and use a stop on the remaining position at $160.90.
Investors should be long multiple positions in the iShares Gold Trust (IAU) from $15.68 to $15.42. Close out half now, and use a stop on the remaining position at $16.16.
Late buyers 50% long the iShares Gold Trust (IAU) at $16.56 and 50% long at $16.34, for an average price of about $16.45, close out half now, and use a stop at $16.16 on the remaining position.
You should now be 50% long the iShares Silver Trust (SLV) at $30.90 and 50% long at $30.34. Close out half now, and use a stop on the remaining position at $30.85.
For Global X Silver Miners (SIL), you should be 50% long at $23.14 and 50% long at $22.48. Sell half now, and use a stop at $21.48 on the remaining position.
I will be updating the action on gold today via Twitter.
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