Originally published April 19th, 2009.
Both gold and silver have suffered technical deterioration over the past week with the result that they are now close to aborting the short to medium-term bullish scenario that was set out in the last update. Meanwhile, large Precious Metals shares are on the point of breaking down from their shallow uptrends in force from December - January after further losses this past week.
As we can see on its 6-month gold has not broken down below key support - yet, and it may even be at a buy spot right now, however, there are two external factors suggesting that the risk of it breaking down has increased significantly. One is that silver has broken below its mid-March hammer low, which is a bearish development, and the other is that the dollar looks like it may be completing a minor base area.
Returning to consideration of the gold chart we can see that last week's fall has not as yet resulted in it breaking below its early April low or below the 200-day moving average or below the support level shown. This confluence of supporting factors means that this is a very important zone, so if gold breaks below it, it could plunge way below the support of the downtrend channel shown. Traders may therefore want to set stops accordingly.
The dollar has held up remarkably well considering the magnitude of the mid-March plunge, which is still thought to have longer-term bearish implications. However, it has refused to break down from the major uptrend in force from last July and has instead formed what looks like a minor base area over the past few weeks above the important trendline so that it now looks ready to break above the line of resistance at 86 on the index to commence another significant upleg. Traders should watch out for such as a breakout as it would be expected to "kick the ball downhill " as regards gold and silver which would be expected to drop sharply as a result. Note, however, that overall the dollar chart looks very bearish with a strongly converging Rising Wedge pattern evident on the chart. This implies that even if the dollar rises back up to, or at least towards, the top line of this converging channel, it is likely to be its last gasp, to be followed by severe decline. If this scenario plays out then we have clear guidelines. Upon the dollar breaking higher and rising towards the upper trendline gold and silver are likely to go into steep decline, and large gold and silver stocks, already buckling beneath the overhanging supply that we examined in yesterday's Marketwatch article on the site, are likely to get hammered. But an approach by the dollar to the upper trendline would be expected to throw up a major buying opportunity across the Precious Metals sector, as the Rising Wedge in the dollar index chart suggests that it will roll over and go into ragged retreat, although it would be wise to wait for the index to fail beneath this trendline just in case it breaks above it.
