12.27.09
For Silver bulls, the current rally might appear to be the start of a new up leg that might challenge previous major highs near $19 or even $21, those given to longer-term chart analysis might be hard-pressed to reach the same conclusion. In fact, the current up thrust might even be offering the bulls a final opportunity to exit at a profit (or a loss?) before a more substantial period of corr3ction ensues. Surely, there are a number of conflicting technical and fundamental forces at work in the Silver market, but we may be able to learn most of what we need to know by simply examining a long-term (monthly) chart of the continuous Silver futures contract.

Silver Trends

Negative divergence
During the course of Silver’s recent year-long uptrend, prices covered a lot of ground, rising steadily from a low of $8.78 all the way back up to $19.42, which was surely good news for those convinced of a long term, secular bull market in the white metal. However, when we examine the money flow on the monthly chart, it becomes clear that Silver has been losing steam for some time now. Notice how negative the slope of the 34-month Chaikin Money flow (CMF) (34) is compared to the bullish price action since last December; this is known as a bearish divergence, one that will usually resolve itself by following through with a noticeable decline in prices. Additionally, take a glance at the current configuration of the StochRSI indicator (in the horizontal panel beneath the price bars); it’s very close to a bearish signal line crossover (see the upper red line). Taken together, this combination of money flow and momentum/cyclical confirmation paints a fairly convincing picture that Silver is likely due for more declines in the months ahead.

Battle of the Titans
Of course, there are additional factors to consider in the Silver market, and an equally negative fundamental factor is the current posture of the commercial and large speculator (hedge funds) positions in the Silver futures market – the commercials are still heavily net short even as the large specs are net long. Large speculators typically employ trend-following systems and methodologies in order to enter/exit the commodities markets that they trade, and it seems clear that they are still believers that Silver’s intermediate-term uptrend still has legs. The commercials aren’t buying that (pardon pun), at least not in large quantities, and seem more intent on keeping some powder dry so as to enable the scaling in of fresh long positions as Silver begins a widely-anticipated corrective move back down toward major support between $15.82 and $15.42.

Technical support for Silver comes in strong in the price zone between $15.42 and $15.82 and then down between $13.50 and $14.00, but daily-based traders might very well find that a decline into the mid-$15s will create some attractive short-term swing trading ops.

Even better, right now you can sell an out-of the money March 2010 Silver $21 call option for more than $500; should Silver reach the mid-$15s during the next month, the value of the option will lose substantial amounts of value and could probably be bought back for a fraction of the sale price. Given the lopsided standoff in the futures market between the commercials and the large specs, this could be a very attractive, fairly low-risk play for those who’d prefer not to trade futures contracts in this market.

Bottom line:
Initiating fresh long positions in the Silver market right now is probably not the best play, given the likelihood of a major A-B-C corrective pattern developing on this commodity’s daily chart. The down wave ‘A’ has already occurred (the drop from $19.42 to $16.80), the ‘B’ wave up is still in progress and all that’s needed now is something to trigger the selling that should start a noticeable ‘C’ wave down toward major support in the upper to mid $15s. The next few weeks should be very interesting in the precious metals market, so stay tuned for more updates as situations evolve.

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By Donald W. Pendergast Jr.
Contributing Market Analyst
www.ETFTradingPartner.com

12.19.09

Sometimes, as traders, we need to stop and do a double-take, especially when a long-depressed commodity or currency suddenly begins to rise sharply. In the case of the US Dollar index (DX), there were most likely thousands of double-takes, as disbelieving traders took a second, third and even a fourth glance at this key currency’s daily and weekly charts. Yes, this Dollar breakout appears to be the real deal, one destined to run even higher in the weeks just ahead, and it might pay for us to invest a little time now and see if we can anticipate the Dollar’s next area of significant overhead resistance. Doing so might even help those of us who plan to re-enter the Gold market (on a cash, ETF or futures contract basis), hoping for a short-term bounce higher when the Dollar eventually meets up with more formidable resistance. Let’s have a look at the weekly chart of the continuous US Dollar Index futures contract (traded on the ICE exchange) to see what technical clues are being offered to us right now.

US Dollar index

The Dollar break seems to be carrying all of the proper technical credentials that might allow it to morph into a major trend reversal (at some point), Here are a few of them:

1. The weekly relative strength indicator (RSI (14)) is rising at a very sharp angle of attack and is just a little below the 60 level; should it increase beyond 60, it would be a substantial confirmation of a strong weekly trend. Notice how the RSI was also manifesting a minor bullish price/momentum divergence prior to the Dollar’s turn higher.

2. Since we all know that the price of the Dollar Index generally moves inversely to the price of Gold, the fact that Gold was anticipated to meet up with very strong weekly and monthly resistance near $1,200 (before plunging by more than $100 over the past two weeks) also offered additional confirmation to this recent Dollar up thrust

3. Notice how the Dollar Index formed a minor double bottom pattern during early-to-mid 2008 (1B and 2B on the chart) before mounting a strong bear market rally as the 2008’s giant commodity bubble was disintegrating. Now look at the price level of the recent Dollar Index low at about $74.21, which is nearly $4 higher than the dead low made during 2008’s double bottom. This means that a higher low has just printed, which is also adding a substantial amount of bullish fuel to this Dollar rally, especially since an up trend is, by definition, characterized by a series of higher highs and higher lows.

4. Trader/investor sentiment in the Gold futures market (as interpreted by way of recent Commitment of Trader (COT reports, put out by the CFTC every week) had been exceedingly (and unrealistically) bullish among large speculators (hedge funds) and small traders, suggesting that a significant correction was imminent. Not surprisingly, the exact opposite situation existed in the US Dollar Index’s COT sentiment interpretation – the large speculators had only just begun to acquire fresh long Dollar positions, meaning that the stage was being set for a complete ‘about face’ in both of these critical investment/commodity markets.

Presently, the Dollar Index appears to be making a beeline toward the major resistance zone near $80.50, a full $3.20 above its current reading of $78.195. This is an important area of resistance ‘confluence,’ meaning that two or more technical tools are in agreement that a particular time/price area should act as a support/resistance (S/R) barrier. Those two indicators include the Fibonacci 38% retracement of the major March 2009 thru November 2009 downswing and the Keltner band mid-line (white curved line), which happens to be a 45-week exponential moving average (EMA). Reasonably, we can expect to see the DX at least pause and rest near that resistance, but only time will tell if that will initiate a correction or a period of sideways consolidation before continuing higher. Gold bulls should monitor for strong areas of support in Gold (1090 –1070 on the weekly time frame) if the DX reaches $80-$81, looking for possible daily-based long swing trade setups in the yellow metal.

The broad US markets are also very vulnerable to a substantial decline of their own, given that the S&P 500 index has been moving inversely to the Dollar index for the past nine months or so. Should this inverse correlation continue, and the Dollar index keeps on rising, savvy traders might start to investigate the possibility of shorting the weakest stocks from the weakest market sectors in the S&P 500 or Russell 2000 indexes.

Long-term, the abysmal fundamental outlook for the US Dollar don’t seem likely to get much better, at least not until the flood of deficit spending is brought under some semblance of control. However, the US Dollar has already experienced two powerful bear market rallies since early 2005, and this current move certainly looks like it has the makings of rally number three. It should be a very interesting New Year for both Dollar and Gold Bulls!

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By Donald W. Pendergast Jr.
www.ETFTradingPartner.com

Author bio:
Donald was born in New York, NY and has been trading and investing since 1979. He has written numerous trade system and educational articles for Technical Analysis of Stocks and Commodities magazine and more than 240 articles for their sister publication, Traders.com Advantage. He actively trades the US futures, stock and options markets using a variety of discretionary trading methods and has been developing mechanical stock trading systems since 1999.

By Donald W. Pendergast Jr.

12.13.09
So, we’ve seen a substantial correction in the Gold market over the past couple of weeks, and that means that Gold is now ready to rocket higher to fresh highs, isn’t it? Probably not, at least not right away, and patient and wise traders/investors will want to wait a bit to see what Gold does as it interacts with any number of key support levels. Let’s take a closer look, hoping to ascertain when/where this current downdraft might expect to meet up with major support.

Gold Weekly Chart

1. Metastock v.11
2. Metastock Profitunity (Bill Williams) expert advisor

The weekly chart of cash Gold suggests that the fresh wave of selling, although getting close to significant daily chart support (near 1100-1100), is very likely to keep heading south toward the more significant weekly support levels depicted on the chart above. Here are some of the key technical highlights:

1. The Parabolic Stop and Reverse system (J. Welles Wilder’s famed ‘ParaSar’ system), although still in ‘long’ mode, is getting precariously close to a stop and reverse (to short) signal (see the trailing string of ParaSar dots beneath the price bars). If it does go into short mode, existing speculative longs should consider closing their positions ASAP.
2. The spread between the 21- and 50-month exponential moving averages (EMA’s) is flattening out for the first time in nearly five months, confirming the loss of upside momentum.
3. The recent Commitment of Traders report from the CFTC suggests that commercial interests in the Gold futures market are still heavily short even as the large speculators (hedge funds and the like) are still overwhelmingly long. The action on the price chart means essentially one thing – the commercials are selling the large specs all the Gold they can handle, hoping to cover their short positions at lower prices in the weeks and months to come.

The Path of Least Resistance

While it is true that a market that has completed a move from $700 to $1,200 in the course of a year should be given every benefit of the doubt, the odds strongly suggest that the path of least resistance – given all of the aspects discussed above – in the Gold market remains toward lower prices. As shown on the chart, the next major confluence area of chart support, Fibonacci support and EMA support all converge near the area of 1070 to 1050. At that price zone we find the 50% Fib retracement of the July 2009 to December 2009 weekly upswing, along with the October 2009 swing highs (former resistance which may provide future support). Finally, we also find that the 21-month EMA also coincides with the same support zone. In other words, expect to see major weekly support near 1070-1050, followed by a tradable bounce on the daily time frame. I’ve taken the liberty of drawing a hypothetical ‘A-B-C’ corrective wave (purple zigzag line on chart), one that may be proportional to the size of the major up thrust that preceded it. While no one knows exactly how this correction will play out, this ‘projection’ of how prices may respond might help keep trader’s focus on the importance of keeping on the right side of this highly volatile market.

Finally, there is also a very strong support area spanning the range from 979 to 990; this one is also characterized by another ‘three-fold cord’ (which cannot be easily broken) comprised of the 79% Fibonacci retracement, the 50-month EMA and the September 2009 swing low. This could be a vital support area for Gold – a significant breach beneath it could really unleash a tidal wave of mindless selling that could take months to repair. Essentially, traders need to see how Gold responds as it meets the first support barrier (1070 to 1050); some questions they need to consider are these:

How far does Gold retrace the plunge from $1,215 before falling lower again? And if Gold moves sharply lower from the initial support level (1070 to 1050) down toward the sub-$1,000 level, just how panicked are the sellers as they unload their long holdings? Are the commercials eagerly scooping up Gold from these discouraged longs or are they waiting for more opportune prices at which to rebuild their long positions?

The current bottom line in cash Gold:

Expect a decline toward 1070-1050 before seeing a tradable daily-based long swing setup appear. Existing speculative long Gold positions should be closed out if the weekly ParaSar system goes into short mode. Aggressive traders might even attempt to go short on any bounces higher on daily and/or 30-60 minute intraday charts. If we see an eventual drop toward the lower support area of 990-970, those seeking to acquire more Gold for their long-term ‘core’ position might find that to be an especially attractive area in which to initiate further purchases.

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By Donald W. Pendergast Jr.
Technical Market Analyst

By Donald W. Pendergast Jr. – Market Analyst – www.ETFTradingPartner.com

12.5.09
Wow – what a week it was in the world of Gold! After charging above $1,200 on the front-month futures contract earlier in the week, Gold finally finished the week on a very weak note, closing below $1,150, which was right above the low established a week earlier in the wake of the Dubai debt debacle. Clearly, Gold is beginning a trend reversal on a daily-based time frame, but the technical picture is less clear over the long-term. Let’s examine a weekly chart for GLD (one of the financial instruments that holds actual Gold) to get a better fix on what might be expected in this volatile market over the next month or so.

GLD ETF Trading

Before going any further, I must admit to being a Gold Bug, having been afflicted with this wonderful malady for many years – including the time period prior to the recent bull run in Gold from 2001-present. Long-term, and given the abysmal long-term outlook for the US Dollar (and all fiat currencies for that matter), declining mine production (most of the high-quality, easier to mine deposits are used up already) and greater awareness among investors regarding the inclusion of Gold in their portfolios, I believe that Gold will easily make it to $2,500 to $3,000 at some point in the next five years, despite several massive sell-offs along the way to the eventual summit. However, in the here and now, we need to also rely on our charts, technical indicators and COT futures market data (Commitment of Traders report, published weekly by the CFTC) in order to minimize losses and maximize gains by waiting for more opportune times to add to long-term holdings of Gold and/or to capitalize on high probability, short-term moves (up and down) that will likely commence from solid support/resistance (S/R) levels in the weeks ahead.
OK, now on to what the weekly chart of GLD is telegraphing to astute traders and investors here:

1. $1,200 was a key Fibonacci extension/Keltner Band resistance area on both a weekly and monthly time frame; major turbulence was expected well in advance – thus the recent tumble came as no surprise to experienced technical traders.

2. Note this week’s wide-range weekly reversal candle, one that printed on extremely heavy volume (see circle at bottom of chart); this is a major reversal signal, especially for daily-based traders, coming in the wake of such a high profile resistance barrier($1,200).

3. Look now at the short-term and long-term money flows (lower portion of the chart); both of the Chaikin money flow indicators (CMF)(34) and (CMF)(144) are revealing pronounced negative divergences with the actual price trends of GLD, which means that the raw fuel (money flowing into GLD and Gold) needed to drive Gold higher is beginning to dry up – for the time being.

OK, so what? What’s a trader and/or investor to do now, given this information? Well, if you’re a long-term Gold Bug, simply hold your core investment positions for the long-haul; that $100+ trillion US national debt/unfunded liability problem ain’t paid off just yet (and likely will never be), so the future for Gold has never looked better, especially for those wishing to diversify out of the Greenback. Let this corrective move play out and trhen consider adding more at lower price levels – $1,050 might be one such a price zone, which happens to be the current 21-week exponential moving average (EMA) price for cash Gold. For those investing via shares in GLD, the area near $104 also coincides with its own 21-week EMA. More cautious investors might wait for a move lower toward the 50-week EMA, which comes in at about $96 for GLD and $975 for cash Gold. The 21- and 50-week EMA’s acts as strong S/R barriers in nearly every kind of market, and Gold is no exception, so you may wish to do further analysis to see if adding on at those particular price areas makes sense for your financial situation.

Traders can be a bit more aggressive; expect to see some sort of a reaction move higher once GLD/Gold hit their 21-week EMA (green box on the chart shows the likely time/price zone in which to anticipate a reversal higher)– this will most likely be a high-probability swing trade play, one that also needs to have a logical stop loss and profit target as well. Daily-based traders can do the same thing – plan on on the 21-day EMA offering some sort of a floor from which a short-term tradable bounce will commence. But be very nimble, with firm stop-loss and profit targets in place before you enter the trade.

Yes, this is a real correction in Gold, but no one really knows how far the price might fall. Even the strongest bull markets need to pause and correct before moving higher, and perhaps this is the case with the Gold market right now. We should know more as the weeks ahead play out; as always, use common sense, be patient and learn to focus on what the charts and long-term fundamental factors are saying, rather than giving in to fear, doubt or the opinions of those who may not have your best interests in mind.

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By Donald W. Pendergast Jr.
Market Analyst
www.ETFTradingPartner.com