Gold & Silver Forum - Silver and Gold...ready to correct and go sideways?

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Silver and Gold...ready to correct and go sideways?

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1-25-2007

As expected, both Gold and Silver are now on much firmer footing. This should come as no surprise as in several of my last reports, I pointed out that Silver has a very strong, well documented history of rallying into early March. History seems to be repeating itself.

A couple of interesting developments were announced today. First, the IMF has announced planned changes that reportedly require Central Banks to exclude any loaned gold from their assets. The goal here is to get a clearer picture of the actual amount of gold the Central Banks typically hold. My take on this is that this will end up making the Central Banks either increase their gold holding or reduce their gold loan activity. Both scenarios are long bullish.

The second, and to me more important development was China’s announcement in 2006 their full year growth rate was 10.7%. This is very impressive and bullish gold as this rate of growth is inflationary. Inflation leads to gold investment.

Since the low of January 5th, Gold has rallied nearly $50. Prices have forged a bottom against the $600 level, as forecast in my last Metal Report, dated January 11th. I took last week off and did not publish a Metal Report for January 18th. Let’s look below at a February Gold Chart.

The technical definition that I as a chartist use in defining a Bull Trend is one where a market makes “Higher Highs and Higher Lows”. This is the chart pattern at work on the chart below clearly shows that at work.

At this time the February Gold contact is getting itself overbought, as seen by a 91.99 Stochastic reading. Stochastics are interesting in that this technical tool both displays overbought and oversold market conditions. It has another extremely useful benefit. It “tells” chartists when a market that is overbought, leaves that stage and enters a stage of gathering even more strength for moves that often become vertical in nature.

Vertical price moves typically develop from overbought market conditions. Once the 2 elements of the Stochastic reading, the red “K” line and the yellow “D” line stay over a reading of 80 for 3 consecutive days, I label the Stochastic reading as “embedded”. Embedded Stochastics often lead to vertical price moves.

The problem in playing for these moves is that don’t often occur. Rather, overbought conditions like the one at hand have a way of correcting themselves on the chart by having the market put in a price correction, which in turn typically breaks down the Stochastic reading under an 80 level.

The gold market is overbought at this time. To make matters more interesting, there exits a seasonal downtrend where April Gold typical breaks down between now and mid March. Seasonal Trends don’t always work, but fading them when markets are at extremes, as gold is in terms of a $50 plus rally, is not wise.

Until the uptrend is broken lets consider getting long via a couple of ways, keeping in mind at all times the seasonal tendency of this market to break at this time of year and gold’s’ overbought condition. Keep in mind that on the 31st of January I will no longer continue to track February Gold and will move my attention to the April contract. It is too soon to trade April Gold just yet in my opinion.

One way to get long is to buy on a pullback to the 18-Day Moving Average of Closes with a stop under the most recent low. Today the 18-Day Moving Average of Closes is at 629.0 and is gaining about a dollar a day in term of price. The most recent price low is 627.0. This currently equates to an approximate risk of $2 if prices were to break and I were to issue a buy signal.

Another potential way to get long will develop if Stochastics embed. Should that occur, I will notify readers of such in my twice daily commentary.

In summation, the market is overbought and while I expect a price break, I am not longer term bearish given the chart action. I am bullish. It remains to be seen if the Seasonal Downtrend will kick in. I would bet on a price correction, but not necessarily a change in the longer term bullish outlook for this market.

The chart picture in silver, is way stronger that that of gold. My last 2 Metal Reports have made mention of the strong seasonal upward price tendency that silver displays at this time of year. Yes, silver has a tendency to rally in the face of falling gold at times.
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Seasonal tendencies to rally in silver at this time of the year come in waves. The first upside wave typically ends on February 4th and resumes back up on March 25th according to the Moore Research Center.

Like gold, silver is now very overbought. Since the January 8th low of $12.095, March Silver has rallied over $1.50 or nearly 12 percent in price. That is a large amount.

Like gold, silver is in an Uptrend. Prices continue to make higher highs and higher lows. Like gold, silver is overbought and is need of either a price correction or price consolidation. Unlike gold, silver has a strong seasonal tendency to remain strong into March.

As long as prices don’t get back under the most recent break low, $13.095 which occurred on January 24th, I am bullish. Like gold, I must respect the overbought status of this market. Given the current chart formation, I prefer to wait for Stochastics to either embed or correct. As mentioned previously, embedded Stochastics occur when both the red “K” line and yellow “D” line stay over an 80 reading for 3-days in a row. As you can see on the chart above, that is not the case. This market is simply overbought at this time and will most likely begin to correct downwards or go sideways within days at the most.

I do not expect to see March Silver get under $13.00. Via my twice daily update I will issue entry signals when warranted.