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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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A Look at the Gold/Silver Markets

The gold and silver futures market continue to shine, leaving many investors who have been expectant of a market top in the lurch. In decisive trending markets, which is what we now have in gold and silver, it is always dangerous to bet against the trend reversing. I must question the wisdom of trying to call a precise top when the odds favor just following the uptrend and placing a protective stop under whatever trendline or moving average you are following. That way, the market will stop you out when the time comes and you will have retained most of your profits. But when you try to second-guess the market in a strong uptrend, you more often than not stand to lose money.

What impresses me about this market is the near-perfect symmetry of the moving averages. I like the fact that the weighted 20-day moving average for both gold and silver futures have not only acted as a strong pivotal support in recent weeks but also as a powerful directional and momentum indicator. Many have asked why the gold/silver markets should even be moving higher right now in view of various fundamental and technical data. But who cares what the "reason" is? Its been so simple: just follow the moving averages! Isn't that all we really need to know?

Gold has done nearly everything a technician could possibly ask of it! Aside from breaking a 3-month line of supply (see chart below) a few weeks ago, it has also rallied perfectly within the confines of a bullish parabolic bowl in its daily chart. This it the classic behavior of a market in a powerful upswing. What else can we ask of the gold market?

Nearly everyone has been talking about the disparity between the bulls and the bears in the gold market, so let's examine this issue. According to the voluntary market sentiment survey conducted by tfc-charts.com (an Internet commodity charting service), 60% of respondents were bullish on the gold market's immediate prospects, while some 18% were bearish and a further 21% were neutral. Now there are a couple of different ways to interpret this data. First, we must qualify that this is NOT a scientific survey and even tfc-charts.com warns that it is not to be used for trading purposes. But still, it does have value and I place even greater value on it since it is conducted on a purely voluntary basis and therefore participants have less reason to lie about their true feelings on the market. Some will point to these high bull/bear sentiment figures as being an extreme in bullish sentiment, meaning that we can expecth a "correction" sometime in the near future. But keep in mind that in mind powerful trending markets, nearly everyone gets bullish somewhere along the way before the trend exhausts itself, so a strong bullish sentiment reading is actually to be expected. In other words, in times such as this you can pretty much chuck contrarian sentiment indicators out the window.

Another consideration when analyzing the latest sentiment data on gold is that if you total up the "neutral" sentiment along with the "bearish" sentiment you get something like 40%, compared to 60% "bullish" sentiment. I tend to categorize the fence sitters at times like this as fulcrums since they are the "fence sitters" and obviously aren't in the market on the long side, but neither are they on the "short" side of the market. They are waiting for a definite trading signal and if it comes they will all pile their money into the market either on the long side or the short side. These fence sitters can really be a powerful pivotal force in the market at times like this when their numbers are large. So if the gold futures market breaks decisively above, say, $385 we could see all of that sideline money shoveled into the market on the long side, which would give the gold rally even more fuel for another rally.

This market has confounded the bears ever since the April bottom and has whipsawed even the bulls who have tried to call short-term peaks, only to have those peaks overcome by higher highs. As the moving averages clearly show, this is a trending market and the proper response to a trending market is to put logic aside, quit trying to second guess the market, and simply ride the trend. Those who did this have done very well to date. Unless the moving averages are violated (confirmed by a reversal of those same averages) then the market will have signaled its intention to resume the upward trend.

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