"The primary expectation [is]... a three-wave correction off the recent lows, culminating in a 5-wave move up that will reverse and produce new lows. One more new high to complete c of b is likely. A move back below the 50-day sma would tend to contraindicate the impulsive count, but overlap of wave 1 at $890 is needed to invalidate the impulse... while physical buyers who've chased the rapidly rising price are literally left holding the bag." ~ Precious Points: B Unbiased, May 25, 2008
As it seemed a growing number of analysts and commentators were awaking to the nature of the recent rally in precious metals with calls last week for a reversal, TTC had the luxury of taking an unbiased view after having seen price action in gold unfold almost exactly as outlined in a chart originally published on May 4. With gold retesting the previous week's high as expected and failing in the area where our favored counts and other indications called for an interim top, the cards simply fell into place as gold cascaded below the 50-day sma, overlapped what would have been wave 1 up and finally came to end the week on trendline support.
Gold has been trading side by side with crude oil, as has much of the market recently, yet it continues to recognize our targets and counts. Thus, while oil will probably continue to provide the cues next week, we can reasonably expect the operative charts which have lead us here successfully to continue working. So, the rising trendline from the May low will be a crucial support as MACD attempts to find support at a potential bearish crossover and RSI struggles to get back above 50. But, with the 50-day sma continuing its decline, the convergence at the trendline will create a crucial decision area that could lead to the new lows mentioned here for weeks. A new count in gold has also surfaced and was instrumental in identifying support this week. It will remain our primary focus next week, but must remain reserved for members only.
Silver has largely tracked gold and reveals a very similar technical picture. Obvious resistance at $17.25-17.30 will be the first target on any sort of strength early in the week. As with gold, silver risks significant new lows on the next failure, but we will continue to take an unbiased approach and seek confirmation.
Despite falling precious metals and generally stabilizing dollar, inflation has become so pronounced that even the Fed has been forced to address headline figures and the threat of expectations becoming unanchored. There is even general speculation the Fed could make token hikes in its overnight rate without further damaging the housing market, particularly since it's policy of accommodation has done little to help mortgage rates thus far.
Though hawkish rhetoric so far has been the Fed's most direct measure against a growing wave of price inflation, the Fed seems to have turned a corner and sees its monetary inflation as now sufficient to neutralize the deflationary force in housing. But with the housing market hardly stable, and Greenspan's assurances notwithstanding, the possibility remains of the entire mess devolving into a deep recession, in which case the extent to which the Fed might attempt to inflate its way out of debt is probably unknowable.
Some Fed members have indicated a desire to reverse their rate cuts aggressively, which seems an optimistic outlook, but one which could contribute to further weakness in gold and silver regardless. Let's not forget the dog days of summer's gone bye when precious metals languished and the viability of the bull market appeared threatened. The intermediate term could see some selling pressure in metals, particularly if the dollar gains ground on the euro's shortcomings more than any particular strength of its own. But while inflation remains the chief concern, and the ability of the Fed to combat it within a receding consumer economy is uncertain, tightening supply of physical metal promise to make at least the long term prospects for gold and silver markedly bullish.
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