Yesterday saw powerful breakouts by the precious metals stock indices and silver, and although gold has not yet broken out, the action in the stocks, which often lead gold, indicates that this can be expected shortly.
When the 200 support level broke on the HUI about a week ago it opened up the risk of a more serious decline towards the big support approaching the 150 - 160 area. The fact that this did not occur and the index only declined by a modest amount was evidence of the fact that sentiment in this sector had become so negative that selling pressure had largely exhausted itself. What made yesterday's advance so impressive was the that the index vaulted above the 200 level, where one would have expected it to encounter resistance, and then closed at the high, significantly above it.
Moves such as we saw yesterday are not common, and almost always signify a trend reversal. Therefore, we will not be perturbed if prices back off in coming days - on the contrary, this would provide an excellent buying opportunity. Given the extent of yesterday's move, and that it took prices into zones of some resistance, and the fact that moving averages are falling, we should not be surprised to see some reaction/consolidation before prices press ahead. Investors and traders should use any such weakness to accumulate the stronger stocks.
We will now turn to look at some of yesterday's action in the gold, silver and dollar charts. Starting with the 6-month chart for gold, we see that although it advanced yesterday, it was not exceptional and did not result in a breakout, although, as already mentioned, the action in stocks indicates that this is to be expected soon. A bullish development will be the break of the downtrend channel line shown.
The longer-term gold chart shows gold to be at an optimum buy spot, just above its long-term uptrend channel line. The RSI and MACD lines show it to be oversold with plenty of upside potential and the chart also reveals that there is little overhead supply to work off.
The 6-month dollar chart shows that the dollar has stalled at a resistance level in the 85 area on the index, and is now not far below its falling 200-day moving average.
The longer-term dollar chart is interesting because it shows that the dollar's countertrend rally has brought it up to make contact with its long-term downtrend line - a good point for the uptrend to end and the larger downtrend resume. An important point here is that yesterday's action in the PM stocks indicates a new uptrend, and the likelihood that the dollar is topping out now, and that, even if it isn't, it hasn't got much further to go - no more than 87 at maximum.
The silver chart is very impressive, a huge breakout yesterday that does not look like some "flash in the pan" event. Even if it backs off short-term, which is likely given the extent of the move, it won't erase the bullish signal given by this advance.
This weekend on www.clivemaund.com we will be examining a range of stocks that look set to do well in the new uptrend.
