Silver and gold short-term tops?
I don’t need to bang on about how I called the rally in gold and silver this year… if you have followed me over the past eight months or so you will be well aware of the reasons behind my bullish optimism. If not feel free to look over my early-2016 articles on bullish reversal patterns in the precious metals.
But now it’s time for an important update! The rally is likely to stall over the summer months in my opinion. I think we have just gone a bit too far too fast and I suspect many of the silver longs are in for short-term speculation, as opposed to longer-term investment. I think therefore there’s a good chance these weaker positions need to be shaken out before the next major leg higher in silver.
Silver experienced a huge short squeeze in the last days of last week and early Monday morning. This looks like the final exit of the longer-term shorts. They finally threw in the towel as buying reached panic levels. We are now seeing record high holdings of silver… which is still bullish in the longer term. However I think this parabolic move in silver signals a short-term top. In the weekly chart above you can see how we shot higher, through the red 200-week moving average resistance at around $20.10/15 on Monday, in the early panic-buying episode to top at $21.10.
It’s interesting how we rocketed from $19.66 on the open on Sunday night to the $21.10 high in about four hours. That’s a 10% increase!
Not a huge surprise that, once the panic buyer had bought all the shorts back, the market stabilised and is starting to head lower. In fact this morning (Tuesday) as I write, I have seen silver trade down to $19.52, which puts us down on the week after last week’s close at $19.73. It also means the break above the important 200-week moving average at around $20.10/15 has not been sustained.
I’m looking for a short-term bear or sideways trend to develop over the summer. Holding below $19.85/80 should help my cause and strong support at $19.40/35 is then the main focus. I do expect bulls to put up a very strong defence here and I would be surprised if we do not bounce at least a couple of times off this level as bulls try to regain control. I certainly would not rule out sideways action through the summer, with prices managing to hold $19.40/35. However, if a break lower is seen through $19.00 we could target an excellent buying opportunity at $18.35/25.
This I think is where the bulls should find it easy to seize back control and we can push higher into the end of the year.
Gold is in fact less negative and has recently underperformed silver… although this process was required after silver had been left lagging behind in recent months. Gold has been in a more steady bull trend, taking its time with long periods of healthy consolidation before a leg higher.
A frustratingly sideways pattern developed through February-May, as you can see in the chart above, before we finally managed a rally to beat the 2015 high of $1306. It’s been very hard for gold bulls to hold longs – even when we beat $1306, we topped at $1315 in mid-June and collapsed as far as $1251. The Brexit vote rescued gold bulls and prices shot higher on the Friday of the result to beat the mid-2014 high of $1345, reaching a high of $1357/58.
This level was re-tested on Monday of this week but we have failed so far to beat it as we have become overbought. There’s a risk of a double top here therefore and this would signal another bout of heavy profit-taking which, as stated above, has been a characteristic of this slow but steady bull market.
Strong support at $1333/30 is the most important level of the week now. Failure here signals deeper profit-taking ahead and acts as a short-term sell signal to target $1305/00 and perhaps as far as strong support at $1285/82.
If however we do kill the negative double top pattern with a sustained break above $1360 we can target the 2014 high at $1388/92. But I would watch carefully for profit-taking here in the short term.
Technical Analyst & Trader
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