The sky certainly appears to be falling for most commodities investors. We are experiencing a very fierce fall and a growing number of investors are simply throwing in the towel. Are they right in doing so? It is certainly becoming harder to go on believing better times are just ahead when so much blood is being spilt in the markets week after week.
We've witnessed metals and mining stocks plunge in the past, but hardly with as much vengeance as we're experiencing now. Could this be the end? Or is this just the great shake out before the next stage of the bull market can begin? To attempt at answering this question we will look at the charts for Gold, Silver, Oil, and the US Dollar in order to try and establish a clear(er) view of what is taking place.
For now it seems that whenever the dollar gains in strength, gold investors make a run for the exits, possibly even selling their gold to buy dollars. For as long as this continues, gold will suffer as the dollar rallies. But what we really have to ask ourselves, did the fundamentals change? Is the US economy back on track? Has the world's faith in the dollar been reinvigorated? Have inflation worries disappeared? I think not. Therefore, even though these are hard times, with the fundamentals seemingly unchanged, hopefully this is just the case of shaking the tree to see what will fall out.
To gain some perspective, we will take a look at the weekly and daily charts.
All charts are courtesy of Stockcharts.com.
GOLD
Gold's weekly chart shows us that its uptrend is still intact despite the huge fall we have experienced. As long as Gold stays above the lower magenta line, this will go down in history as a correction, albeit very severe, in the midst of an overarching uptrend, nothing more.
However, a break below the magenta channel will damage the picture severely. Although there are support levels around $745 and $700, a break below could mean that Gold is entering a pattern of lower highs and lower lows, i.e. the dreaded downtrend. The RSI, DMI (Selling power) and MACD are all in bad shape, and a therefore a break must realistically be feared.
The bulls have to step forward now and take control in order to prevent a powerful sell signal.
We will switch now to Gold's daily chart to see if there's any hope for a quick recovery, one which could potentially stave off disaster.
The daily chart clearly shows that once Gold fell below its 50 d. MA, it dropped like a rock. After a brief pause around the $825 level, Gold touched the support zone at $775 after a precipitous one day drop. Positively, Gold closed well above its low on Friday, which could indicate that the sellers have dried up, and perhaps preludes a further bounce this week (starting with a black candle on Monday?). If Gold manages to close back above $850, a bottom may be set, though such a move will prove difficult due to the large amount of resistance at this level.
The RSI, DMI (Selling power) and MACD are all at extremely low levels, which improves the chance for a bounce higher this upcoming week. Hopefully we will not be disappointed.
SILVER
The weekly chart for Silver has turned bad very rapidly these past two weeks. Once Silver fell below its 34 w. MA it took a big dive, loosing almost 30% over this short period.
Silver even breached the magenta trend line 1 and touched its support zone at $12.50. With a close just shy of $13.00, Silver is still in very great danger. It is almost certain that the magenta trend line 1 cannot be defended, and the support zone at $12 to $12.50 will have to hold Silver. This zone acted as a reliable support in the past during most of 2007, so it is justifiable at this stage to expect it will hold. It will not be easy, but the bulls have to fight to establish a new bottom at these levels to allow Silver time to recover form the blows it suffered this last month.
The daily chart will tell us if we can expect a successful effort to be made at the current levels.
The daily chart shows that there might be some light at the end of this dark tunnel.
Last Friday's candle gives us hope for a recovery this upcoming week. The close was well off the lows made on Friday, leaving a long shadow that touched the support zone. If a black candle forms, most preferably with a close above the resistance zone near $14.00, the low for this fierce fall might be set.
The RSI, DMI (Selling power) and MACD are at such extreme levels that a bounce higher should be next. If this bounce occurs it will have to deal with a huge amount of resistance at the $14 and later the $16 level. Although things look very bad at this stage, all is not lost. If the bulls manage to set things straight this week we could witness a nice spike bottom formation, setting things up nicely for a bigger recovery going forward.
OIL
Oil finally entered into a long overdue correction after its huge run uphill.
The current correction reached the top end of Oil's rising (wedge) channel and its 34 w. MA. This cross support could hold the fall from progressing any further. Up until now the chart was very strong and every dip was taken as an extra opportunity for investors to step into the market. This type of behaviour further suggests that this support can be assumed as a good line of defence.
However, for the future development of the Oil price, it would actually be preferable if the correction would continue onwards to the $100 level in order to sufficiently cool the chart, at which point Oil could turn and make its way to new highs.
Whether or not Oil will make a stand at the current levels can be more clearly seen in the daily chart.
The expectation for a bottom at the current level is confirmed by the daily chart.
We can see that the price is trying to form a bottom between $110 and $115 just above the $110 support and the magenta trend line. The RSI is already in a bottoming process and a break of the magenta line will trigger the first buy signal, followed by a second when the RSI re-enters positive trend territory above the 50 level.
The Selling pressure is showing negative divergence with the lows in the Oil price, another hint that a turn in the downtrend could be close at hand. Although the MACD is a following indicator, it is clearly showing that the downtrend is loosing speed and a turn or at least a consolidation is to be expected.
A break above the MACD's trigger line will give us a first indication that the trend is changing, although it is still well below the zero line and positive trend territory.
USD
The last two weeks were very profitable for those long the USD, as it finally managed to break above the important 34 w. MA for the first time since 2005. This move will be followed by another buy signal if/when the 17 w. crosses back above the 34 w. MA.
The current move higher is impulsive, suggesting that this move isn't over, with the USD likely to touch the all-important 80 level (not seen since July 2007). The RSI, DMI (Buying Power) and MACD are all looking very good at this stage, and there are no indications that this will change in the near-term.
However, that the USD has entered a new long-term uptrend is still very doubtful. If nothing else, it will have many hurdles to cross before we can even consider pronouncing that a long-term uptrend in the USD has begun.
For now this most recent move must simply be viewed as a correction in the downtrend and nothing more.
The daily chart of the USD shows once again that the current move higher is clearly an impulsive one with a lot of strength. One could say that the elastic finally snapped back, with this move producing some nice buy signals in the chart. The 14 d. crossed above the 50 d. MA again, both the MA's are rising, and the RSI, DMI and MACD are all very positive.
However, this move was so quick that it caused the chart to overheat, and therefore we can expect a cool down to occur before any further progress can be made. The RSI is at extreme levels, as is the DMI and the MACD. A correction or consolidation back to the support zone at 75 could follow now before the higher resistance levels at 78 and 80 are attacked.
However, if the bulls are ready to stampede, we must be prepared to see a run at the 80 level before a correction occurs due to what will then be even more extreme levels in the chart's technical indicators.
