Gold, Silver and Stocks Analysis, Forecast
Stock-Markets / Financial Markets 2009 Nov 02, 2009 - 02:42 AM GMT
The S&P 500 was down over 4% for the week. This was the second week in a row that the market closed down. A short term correction is underway. It remains to be seen if the short term correction turns into a medium term move down.
Up first is the daily chart of the SPX. It shows lower diagonal support broken below. If the October low marked by the blue horizontal line is broken below it would raise the possibility that an intermediate term move is unfolding.
The Oct. low is close to the 38% Fibonacci retracement level of the entire rally from July to Oct. and represents underlying support. Price has also fallen below the 50 day moving average.
The weekly chart shows the market stalling just below its 50% retracement level from its 2008 high to its 2009 March low. If 950 is taken out to the downside, it would raise the possibility a fifth leg down of the bear market is likely. As of now this is mere speculation. Note the increase in volume on this week’s move down.
Bonds
The 10 Year bond was up just under 1% for the week. A double bottom may have been put in back in June – July near 115 (blue horizontal line). Bonds have been steadily falling since the beginning of the year and during the stock market rally. If stocks continue to fall, bonds will rise.
Dollar
The direction of the dollar may be the key to the direction of the other markets. Since March when the stock market rally began, the dollar has steadily declined, as the chart below shows. The second chart shows that commodities have also moved up while the dollar fell.
The daily UUP chart shows the recent short term rally by the dollar. MACD has made a positive crossover and price has broken above its falling upper diagonal trend line.
Significant overhead resistance is marked by the dotted horizontal trend line at 23. The dollar’s 50 dma is in the same general area (22.81). Until resistance turns into support, this move is just a bounce. Note that volume expanded on the move higher.
Up next is the weekly chart. It shows the steady decline since March. Overlaid on the chart are the Fibonacci retracement levels. The yellow band represents significant support going back to the 2008 lows.
The dotted horizontal trend line near 78, goes back to 2008, and represents significant overhead resistance. Notice that MACD is pinching together and may be getting ready to make a positive crossover.
If the dollar can rally and stay above 78, the next target would be its 38% Fib retracement level near 80. The dollar still remains imbedded in its long term downtrend.
So far this rally is nothing more than an oversold bounce. The strength of the rally remains to be seen. There are many investors short the dollar that could get caught offside. Any further rally would put a head wind to stocks, commodities, and the precious metals; as the second chart below shows.
Commodities
Commodities were down about 3% for the week. Once again, the short term dollar rally played a large part in the decline. A falling dollar equals rising “prices” for most things; while a rising dollar causes a fall in “price”, as the dollar is what all goods are priced in – including gold and silver.
This “pricing” of goods in Federal Reserve Notes (dollar bills) is an illusion of the highest order. It is one of the paradoxes the international bankers use to obfuscate the truth: that gold and silver are constitutional money, not dollar bills or FRN’s.
The illusion runs so deep that even gold and silver are “priced” in paper dollars. It is this lie that is the root cause of the financial crisis: fiat money is not worth the paper it’s printed on. They are merely promises to pay – not payment.
The daily chart of the CCI index shows the short term pullback that has occurred so far. The damage has been minimal. If the dollar continues to rally there will most likely be further downside action.
MACD has put in a negative crossover, which suggests the worst isn’t quite over. The first Fibonacci retracement level would be a “normal” correction; and would not place the longer term trend in jeopardy. A break below the blue dotted horizontal line would be a cause for concern.
Gold
Gold held up pretty good for the week, falling less than 1%. It gave back $9.50 to close at $1045.70. So far the pullback in gold has been minimal. Price bounced off support indicated by the yellow horizontal band.
MACD, as mentioned last week, has made a negative crossover; suggesting further downside action is possible. A break below horizontal support would place the $1000 price level as the next target.
Next up is the weekly chart. The inverse head and shoulders break out is still intact; however, so far it has not been a stellar performance, which may be a good thing. Time will tell. Supernovas tend to burn out and crash. The tortoise wins the race. Upside potential is significant: $300 to the $1300 area (1000-700=300 – 1000+300=1300).
Gold may be throwing a head fake. A short term correction has not yet been confirmed. This could simply be the pause that refreshes; however, STO is overbought and curling over. If the CCI index at the top of the chart breaks below 100, then a test of the breakout area is likely. A test of support that holds would be positive long term; as well as working off the overbought readings.
Silver
Silver did not fare so well for the week: it fell over 7%. I remain bullish on silver long term; however, as mentioned in last week’s report: CMF money flows had moved from strongly bullish to negative – throwing up a caution flag. The negative RSI divergence was pointed out, as was the negative MACD crossover. Both are still in place.
The upper gap has been filled and horizontal support resides just below along the dotted horizontal line. The 50 dma has been broken, which suggests further downside action. CCI shows oversold readings, so a short term bounce is possible. Volume expanded on the move down.
On the weekly chart, silver is testing support marked by the yellow horizontal band. RSI has turned down and MACD is starting to curl over. The histograms are receding towards zero.
If support around 16 does not hold, then a test of the first Fib retracement level near 14 is the next target.
Note that the daily chart above shows two open gaps between 16 and 14. Volume expanded on the move down on the weekly chart as well.
Gold Stocks
Precious metal stocks had a bad week, falling over 9% to close at 42.37. Quoting from the two prior week’s market wrap reports:
Presently, GDX is testing support at 48. If this level does not hold, the index will most likely fill the open gap (blue horizontal arrow). More significant support resides further below at 45, followed by intermediate term support at the yellow band.
Notice that MACD is curling over, as if getting ready to put in a negative crossover. The histograms are receding and RSI has registered a negative divergence: a lower high, while price made a higher high.
The weight of the evidence suggests at least a short term consolidation/correction. A test of the break out area is likely (45) [10/16/09 report].
Support at 48 did not hold and the open gap on the daily chart just below 46 looks like it is begging to be filled. Significant support resides at the break out area around 45.
Such price action would be nothing more than a healthy short term correction/consolidation. If it develops further, major support is shown to be at 41-43 as marked by the yellow horizontal band.
Note that as mentioned last week, not only did MACD look like it was going to put in a negative cross over – it did. Histograms have turned down into negative territory as well.
If RSI breaks below 50 more downside action is likely. The biggest risk is overall stock market risk [10/23/09 report].
Needless to say – more downside action ensued, per this week’s +9% loss. The daily chart below shows: the open gap near 46 getting filled; horizontal support at 45 broken below; and lower diagonal support broken as well.
Intermediate term support (yellow band) is being test. All in all it was a rout. Volume expanded on the decline. Both the CCI and STO are flashing oversold readings, so a bounce is possible.
As I stated last week: the major risk to gold and silver stocks is overall stock market risk. Unfortunately it played out this week.
Up next is the weekly chart with the Fibonacci retracement levels overlaid. Horizontal support (45) marked by the blue line was sliced through. The next target is the band of support centered near the 38% Fib level.
RSI has turned sharply down, but has not broken below 50. MACD is curling over and looks like it is setting up for a negative crossover, which would be a significant development, suggesting more downside action ahead. The histograms are retreating towards zero as well.
Let’s see if the support zone (tan band) holds. Once again: the major risk is overall stock market risk; which, in and of itself, is exposed to any upside rally by the dollar.
The Gold Miners index (GDX) is on a point and figure sell signal with a downside target of 32.
Summary
The dollar is in the driver’s seat. If the dollar rallies: commodities, stocks, and the precious metal sector will fall. It looks like the stock market has more downside action to it; however, a short term oversold bounce is possible. If stocks fall – bonds will rally.
A rising dollar will put pressure on all commodities, including gold and silver. On the other hand, if the dollar returns to its longer term down trend, then stocks and commodities will continue their upward trends. Unfortunately, the future is not ours to see – only to act upon.
Gold is holding up better than silver, so act accordingly. The gold stocks are very weak. Booking any profits may be a good idea. Few charts are on the stock watch list because there is a lot of risk out there. Better entry levels may lie ahead.
Earlier tonight CIT filed for bankruptcy, leaving a 2.3 billion bailout flying in the wind. It will be interesting how the street takes it. Heavy selling is occurring in Japan right now.
The full market wrap report with our model portfolio and stock watch list can be accessed at the Honest Money Gold & Silver website. A three month trial subscription is on $69, including the new book Honest Money. Stop by and check it out.
Good luck. Good trading. Good health, and that’s a wrap.
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Douglas V. Gnazzo
Honest Money Gold & Silver Report
About the author: Douglas V. Gnazzo writes for numerous websites and his work appears both here and abroad. Mr. Gnazzo is a listed scholar for the Foundation for the Advancement of Monetary Education (FAME).
Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.
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