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On May 3rd I wrote that futher downside potential was very real in the gold and silver
markets after key levels that I tried to warn readers about back on March
27th. On April 11th I warned that we should
all be on the lookout for
the “Death Cross” that was about to take shape in gold that was the signal to stay away from the long side. Gold was at $1,660.00 when I wrote that.
Sure enough, the bearish case played out as
I thought it would and the death cross
in gold did take form. As a result, we sit here
with gold significantly lower than it
was at the March high of
$1,792.00. Gold, over $200.00 per ounce lower than it
was just two months ago
has some very bearish indicators working against it at the moment including no word about any further quantitative easing (although we know the FED stands at the ready to print more money) and
a potential liquidity event about to grip most of
Europe with far reaching
global ripple effects. However, if you recall back in my March analysis, there was the potential brewing for a major technical
inverse head and shoulder
pattern in the longer timeframe of gold that, if it plays
out, could vault gold to
new all-time nominal highs. However,
the probability of that
pattern taking shape is getting slimmer
as the days pass, and remains out of reach so long as gold continues to make
a series of lower highs and lower lows. I suggest we take a look the chart.
As you can see,
the death cross played
out and gold slipped significantly
further shortly thereafter.
The level I am watching
with keen interest right now is the $1,535 level. If that level is
breached on a closing
basis, or if it falls significantly through that level, then
the next potential stopping point for gold could be at the $1,300.00 level.
The inverse head and shoulder patter is still
in play but is admittedly looking uglier and less proportional as each day passes. Although I feel it is
unlikely to play out,
gold cannot fall below $1,535 if we are to keep that pattern in play. We are potentially still in a right shoulder forming area right now, as we can
essentially take any level between
$1,535 or $1,604 to form a base for that right shoulder. Gold must stay flat or start to rise soon if we are going to put that pattern in play.
However, investors
need to be very cognizant of the fact that the death cross usually implies that the trend has officially reversed
indicating that further declines are very likely. Not until the 50 day cross back above the 200 day in what is known
as the golden cross, will I be
going heavily long.
Further concern
lies in how far away gold is
moving from the upper line of the descending channel implying that at the moment, the bears have the upper hand. The
50 day moving average should now be treated
as resistance. A break through
that resistance could be used
to signal going long. The major concern
is that there is no real support at the moment meaning that we could
see precipitous drops in
the price. With both the 50 and the 200 day averages significantly breached, the market will most likely
focus on prior lows of
$1,535 or $1,523 as areas of immediate strong support, or, as the market
likes to do, pick round numbers like $1,550 or
$1,575.00.
Of course, technical analysis is not a sure science but it
has not failed gold trading
since the double top was
put in place. Fundamentals (news of additional easing or liquidity measures) will outweigh the technical picture so keep
your eyes open.
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