Gold Price About to Plunge?
Commodities / Gold and Silver 2010 Oct 17, 2010 - 12:47 PM GMTBy: Merv_Burak
Short term indicators are suggesting weakness in this latest move by gold into new highs. Are they telling us that a plunge is ahead?
GOLD : LONG TERM
The price of gold is a hundred dollars above its long term moving average line so one can surmise that there is no immediate danger of the gold reversing its long term trend anytime very soon. Shorter term moves may be something else but the long term remains solid. Gold remains above its long term moving average line. The long term momentum indicator remains in its positive zone above its positive slopping trigger line. The volume indicator continues to move higher in all time high territory and above its positive sloping trigger line. What more can one say? The long term rating remains BULLISH.
INTERMEDIATE TERM
Gold is just a little less than $50 above its intermediate term moving average line so here too there seems to be no immediate danger of a reversal of trend. We had a nice intermediate term up trend line in progress (see chart in the short term section) but the action strengthened further and now we have a more aggressive up trend line. This may have the makings of a MERV’S FAN PRINCIPLE set of trend line where the third line (should we get one) would be a blow-off stage and the end of the bullish trend for some time. We’re not there yet and hopefully will not get there. A correction of a few weeks would be welcome, however, as no trend can go on forever as the gold trend has been doing. The trend must take a rest to consolidate its gains and prepare for the next thrust into new highs. A blow-off would halt the trend for much longer than a rest period would, and take gold much lower in price doing so.
For now gold remains above its positive sloping moving average line and the intermediate term momentum indicator remains in its positive zone above its positive sloping trigger line. The volume indicator is also positive remaining above its positive trigger line. All in all the intermediate term can only be rated as BULLISH. The short term moving average line continues to confirm this rating by remaining above the intermediate term line.
SHORT TERM
From the chart we see as the gold price accelerated on the up side the momentum indicators, both the short term RSI and the Stochastic Oscillator, were topping out. The strength of the upside price move was just not there, at least not at the level of previous upside moves. This is usually a warning to watch out below. Now, as these are short term indicators one might therefore assume that the potential move to lower levels would not be too severe. That is probably true but it also is true that a more severe move could result from such action. The operating criteria here is to be on alert. We are being warned.
Despite the warning the present trend in progress is still quite positive and has not yet turned around. Gold remains above its positive sloping short term moving average line and the short term momentum indicator remains in its positive zone. However, the indicator has already dropped below its negative sloping trigger line and heading lower. It has also shown a negative divergence versus the price action and is in its overbought zone. I would look for the indicator to drop below its overbought line as a confirmation that a short term reaction is in progress. In the mean time the rating remains BULLISH with the very short term moving average line confirming such rating by remaining above the short term line.
As for the immediate direction of least resistance, that should be the down side with all the warnings of a potential reversal at hand but most likely the price of gold will stay steady for another day or two before we can say that a reversal of trend is here. So, I’ll go with the lateral direction.
SILVER
The silver chart, as with the gold chart, gives us a relationship between the price action and the momentum (or strength) of such action. Both the Stochastic Oscillator and the RSI are momentum type indicators. More elegant commentators may describe them differently giving them fancy words or descriptions but the basically provide an assessment of price action strength. One is more aggressive than the other but that’s just a degree of strength. So, what can we decipher from them?
Since mid-August the price of silver has been in a strong up trend moving within a tight up trending channel. During this time the momentum indicators moved quickly into their overbought zone and once there began moving in a sideways direction. Both indicators have established a support level for their strength readings similar to the lower support line of the price channel. On their upper side we do not have a defined resistance level for either of the indicators. The RSI made its peak in early October and has remained below it ever since. The Stochastic Oscillator (SO) made its peak in early September and since that time each succeeding peak has been slightly lower than the preceding one. This past week the price made a sharp move higher breaking above its upper channel resistance line. Both indicators, however, stayed below their previous highs from the previous week. The sharp move by the price through the channel resistance line may indicate either a blow-off stage, minor but still a blow-off, or it could indicate the start of a new more aggressive up trend. The momentum indicators suggest that a new more aggressive up trend is not what we have, which leaves ---
Despite all that brilliant analysis above a technical analyst stays with the on-going trend until such trend reversal has been confirmed. So, from the short term perspective what is that on-going trend?
Silver remains above its positive sloping moving average line. The short term momentum (13 Day RSI) remains well inside its positive zone. It has, however, just dropped below its already negative sloping trigger line. The indicator also remains inside its overbought zone and has not yet dropped below the overbought line. The daily volume action remains positive and above its on-going 15 day average volume line. All in all, the present rating for the short term remains BULLISH. This continues to be confirmed by the very short term moving average line remaining above the short term line.
As for the long and intermediate terms, it should be obvious that both are BULLISH.
PRECIOUS METAL STOCKS
The precious metal stocks (gold and silver) continue to move higher but the advance seems to be slowly running out of steam for now. The various Merv’s Indices are so bullish at the present time that there is only one direction for them to go and that is in to slow down and reverse. That would not be a calamity but something that would be very healthy for a continued advance towards new all time highs.
The one Merv’s Index that did not advance this past week was the Merv’s Penny Arcade Index. It’s still up there as the top performing Index but we have to be on alert should this Index actually reverse its trend. One week does not a reversal make but every reversal does start with that first week. As often mentioned here I expect that a reversal of basic trend in the gold and silver stocks will show up first with the pennies reversing, possibly some time before the rest of the group does. We’ll see what happens this coming week. Will the trend come to a halt or not?
Merv’s Precious Metals Indices Table
Well, that’s it for this week. Comments are always welcome and should be addressed to mervburak@gmail.com.
By Merv Burak, CMT
Hudson Aero/Systems Inc.
Technical Information Group
for Merv's Precious Metals Central
For DAILY Uranium stock commentary and WEEKLY Uranium market update check out my new Technically Uranium with Merv blog at http://techuranium.blogspot.com .
During the day Merv practices his engineering profession as a Consulting Aerospace Engineer. Once the sun goes down and night descends upon the earth Merv dons his other hat as a Chartered Market Technician ( CMT ) and tries to decipher what's going on in the securities markets. As an underground surveyor in the gold mines of Canada 's Northwest Territories in his youth, Merv has a soft spot for the gold industry and has developed several Gold Indices reflecting different aspects of the industry. As a basically lazy individual Merv's driving focus is to KEEP IT SIMPLE .
To find out more about Merv's various Gold Indices and component stocks, please visit http://preciousmetalscentral.com . There you will find samples of the Indices and their component stocks plus other publications of interest to gold investors.
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