Only days after I issued important trading summaries for both gold and silver, both metals suffered significant selling pressure today to break major areas of longstanding support. As a result, both charts have been significantly bruised and both metals have undergone significant technical damage.
For a review of important levels please review the post I made on Thursday, just one day before the massive Friday liquidation.
Tonight I will update the charts for my readers to show how bad the technical damage was.
First gold. As you can see by the chart below, (click to enlarge) we gold lost critical support at $1,520 which was a long standing support shelf in place since the October 2011 selloff. That support held on 3 prior sell-offs until today when it wasn’t just breached, but it was sliced through like a hot knife through butter. That support area offered very little resistance and was poorly defended by buyers. Note that the sell-off ended at the level where gold took off in it’s parabolic blow-off in July of 2011. It took 3 months for gold to rocket from $1480 to $1923 whereas this bleed from that top has taken 18 months. (first dotted blue line on the chart). The next area lies at approximately the $1360.00 mark and then there is the area of $1318.00 which marks the bottom of the inverted head and shoulder that led to the massive run for gold, a period in which it gained $600.00 an ounce in 8 months. (Why must I still address emails refuting my claims that this was a parabolic phase for gold?) Quite interestingly, given that I’ve isolated $1318 as an area where massive support may lie, I note that the first massive sell-off of gold equalled roughly -17.7% on a closing basis. It’s quite funny how charts often tell a big picture for those that want to look for it because from the start of this sell-off to $1318 in gold will equal roughly the same percentage drop. (I just thought I would point this coincidence out but I am not attaching significance to it). The fact is that other than round numbers (which the markets like to use) we only have a few areas of support before gold reaches the approximate level of $1300.00. THAT IS THE PROBLEM with parabolic moves in prices of assets. When assets move in a parabolic fashion upward, they fail to build any strong areas of support to aid a decline when the asset price turns.
Next I’ll turn to silver, updating the chart from the other night.
As you can see in the silver chart (click to enlarge), we also lost key support at the $26.15 “shelf”. Next areas of strong support lie at $22.50, $22, $20 and dare I say a retreat to where the upward parabolic move started at $17.50. Whether it gets there is anyone’s guess but I can assure you if it does, yours truly will be heavy on the buy side.
Not much else has changed other than the fact gold has broken down from it’s bull market channel and that today’s moves were confirmed by volume which validate the breakdowns. This very reason is why I feel there may be more downside left before we can safely go long with confidence.
Something to watch for next week; Expect a rash of margin calls starting Sunday afternoon (put up or be liquidated) which will in my opinion inflict further damage to gold and silver on Monday. There remains a small chance that today’s event could be a one day “wash” but I don’t favour this. I am of the view that silver still has some catch up to do in order to equal gold’s decline. What was important to note today was that we did not see any strong support rally. Prices just continued to move down, only pausing along the way. The selling and downward movement was relentless indicating that in my own personal view, it will have some follow through attached to it. How quickly both metals fall to their next levels of support remains to be seen (if they do). Keep in mind that broken support becomes resistance when trading.
Lastly, to answer some questions I have received via email, if you go back through my posts you will note that I am not entirely dead against the metals. Quite the contrary. My longer term outlook is bullish but bullish to the extent of previous price appreciation before the metals went nuts in 2011. The problem with super spikes is that corrections can be violent. I turned intermediate term bearish in late 20011 and have remained as such since then. I am of the view that both metals must see lower prices before any sustainable continued rallies to the upside. I will look to be a buyer at lower levels or, if a convincing bullish confirmation is made. ($1620 for gold and $28.50 for silver). In the meantime however, the objective is to make money by trading so we can take those proceeds and provide for our families. If you joined me today and made some money, good for you. I have a feeling there is more money to be made staying short near term before the metals reverse. In part this thinking is based on the large head and shoulder confirmation of the HUI that I pointed out the other night, the collapse of copper and platinum some 3 weeks ago and the sheer strength of today’s decline.
However, WHEN this correction finishes watch for an incredible tradable rally on the bounce. This is why we take this one day at a time my friends. If those support shelves are penetrated to the upside again then I might look for a rally. Keep in mind that these sell-offs could be a one day wash but I’m not favouring that scenario tonight for reasons already provided. The fact that many people will be reading the weekend headlines that talk about Friday’s sell-off may spook more people. Given all factors I already mentioned, I think we have to strongly consider the fact that prices may move lower before any reversal.
Follow through is the key my friends. Watch Monday’s trade for additional clues.
I maintain that if we are seeing the end stages of the correction from the 2011 tops in both metals we need to see at least $22.00 and $1300 respectively in order to call those corrections complete. I would much rather have a complete wash, get their quick and be done with it but the markets never make things that easy.
Have a great weekend and as always, thanks for reading.
