Major Set-ups Unfolding in Gold and Silver

01/14/2011 7:01 am EST


There is a potentially big set-up in the precious metals sector along with the dollar, which looks like it’s about to unfold. Since mid-October of last year, gold started to show signs of distribution selling. Only a month later, in November, silver started warning us that some big players were taking some profits off the table also.

Distribution selling is easy to spot on the charts. In short, you will see heavy volume selling accompanied by strong moves to the downside.

Now if we look at the US dollar chart, we see the exact opposite price action. We see sharp rallies during October and November of last year. It’s normal to say that gold and silver move inverse to the dollar, so this price action makes perfect sense.

The interesting thing with the US dollar is that in November and December, it rallied, breaking through a key resistance level, and has been consolidating above support ever since. If this bullish pattern (bull flag) plays out, then it’s just a matter of time before the dollar makes another strong rally upwards, which will put downward pressure on stocks and commodities.

Take a look at the charts below.

US Dollar Daily Chart

The 50-period moving average has provided key support/resistance levels for the previous trends, and if it holds true going forward, then we are not far from another rally in the dollar.

Click to Enlarge

Gold Futures Daily Chart

Gold moves inverse to the dollar, so if we get a higher dollar, then look for gold to have a stair-step pattern lower.

Click to Enlarge

Silver Futures Daily Chart

Silver looks ready to do the same thing as gold.

Click to Enlarge

In short, we could see a major shift in momentum from up to down in both the precious metals and equities markets. Keep in mind the market has a way of dragging out patterns/moves, so while the chart looks bearish, and I think a reversal is near, things could just chop around for another month or so before a definitive breakout is made.

Choppy market conditions are great for trading options, but not for short-term trend traders like myself. This is why you don’t want to anticipate moves (pick a top).

Currently, I am neutral on metals and the dollar while waiting for a set-up that must have clear risk/reward characteristics.

By Chris Vermeulen of

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