Silver and Gold: A Bear Market Rally?

02/18/2015 10:20 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

Gold and silver mining stocks were hit hard on Tuesday, so MoneyShow's Tom Aspray examines the charts to see if the recent rally in precious metals was just a pause in the overall downtrend and if there's now a selling opportunity.

Overseas markets are higher again in early trading as once again there is optimism that Greece will eventually find a way to resolve their debt problems without leaving the EuroZone.

In US trading Tuesday, the early selling was absorbed as most of the major averages did close with slight gains, yet the A/D ratios were negative. This afternoon we get the FOMC minutes, which will give those fixated on the Fed something new to stew over.

The gold and silver mining stocks were hit hard as the SPDR Gold Shares (GLD) lost 1.67% on the day. The rally in the precious metals and the metal mining stocks in early 2015 purred more hope from the precious metal bulls. Now that they have given up much of their gains, what should investors or traders do now?

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Chart Analysis: The weekly chart of the SPDR Gold Trust (GLD) shows that it came very close to converging resistance, lines a and b, on the recent rally.

  • GLD had a high in January of $125.58, but is now down 7.6% from this high.
  • This is a typical rebound after the bear flag was completed in early September.
  • The short-term uptrend and the quarterly pivot are now in the $114.58 area.
  • There is additional support at $112.32 and a weekly close below this level would be quite negative.
  • The weekly OBV moved back above its WMA one week after the November lows.
  • The recent decline dropped the OBV back below its WMA last week.
  • The OBV has important long-term support at line d.
  • There is initial resistance at $118.32 and the declining 20-week EMA.

The daily chart of April Comex gold contract shows that it peaked at $1308.80 and is now down over $100 from the highs.

  • Prices are now just above the monthly pivot support and the quarterly pivot at $1190.70.
  • The uptrend from the November lows is now at $1180 with longer-term support in the $1150 area.
  • The daily on-balance volume (OBV) turned positive in early January but dropped back below its WMA on January 29 (line 1).
  • The OBV is well below its WMA with more important support at line f.
  • The weekly OBV (not shown) is also below its WMA.
  • The Herrick Payoff Index (HPI) signaled positive money flow in early January before the $100 rally in gold.
  • The HPI dropped below its WMA and support, line g, at the end of January.
  • The money flow turned negative on February 6 and is still declining.
  • The declining 20-day EMA is at $1239 and gold is oversold on a short-term basis.

Next: Another Gold and Silver Mining ETF to Watch

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The Market Vectors Gold Miners (GDX) peaked on January 21 and has since been drifting lower. It is still up 11.92% YTD.

  • The daily starc- band is at $19.64 with the quarterly pivot at $18.91.
  • The uptrend from the 2014 lows, line b, is now at $18.00.
  • Volume increased yesterday as the OBV dropped below its WMA six days ago.
  • As GDX was making higher highs, line a, the OBV was making lower highs (line c).
  • The weekly OBV (not shown) is also now below its WMA.
  • There is first resistance at $21.37 and the 20-day EMA.
  • There is much stronger resistance in the $22 area.

The weekly chart of iShares Silver Trust (SLV) shows that it completed a year long flag formation, lines e and f, in the middle of September.

  • After dropping to a low of $14.64 in early November, SLV had a nice rally.
  • The rebound took SLV back to just below the breakdown level at $18.
  • The quarterly pivot at $15.60 was tested Tuesday.
  • The weekly starc- band is now at $14.55.
  • The daily HPI (not shown) on the Comex silver futures is below zero, indicating that money flow is negative
  • Volume has been declining over the past few weeks but was heavy Tuesday.
  • The weekly OBV is just barely below its WMA and the daily is negative.
  • The 20-day EMA and first resistance is now at $16.36.

What it Means: The technical review of gold and silver indicates that the recent rally was just a pause in the overall downtrend. Prices just made it back to key resistance before reversing sharply, which is also consistent with a bear market rally. Both should bounce over the next week or so, but unless the volume is heavy, it is likely to be a selling opportunity.

The Market Vectors Gold Miners (GDX) does act better as do some of the individual gold mining stocks, but the current decline will need to be watched closely.

How to Profit: No new recommendation.

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