GOLDReport

May 17, 2007

Observations

My last report was 2-weeks ago, an unusually long time since an update as I took some time off during Memorial Day Week. Now back and refreshed, it is time to once again take a hard look at the metal markets and to change some contract months we look at. Going forward, I will look at August Gold and will comment a bit on June Gold as well.

In my last Metal Report dated May 17th, I was bearish on gold. I still am. June Gold closed on May 17th at 657.2. It has not rallied higher than 665.9 but has broken as low as 651.5 since May 17th. All in all, not much performance has been seen on either the up or downside of this market.

The issue I have is that the chart pattern and seasonality of the gold is not bullish. Let's discuss why I believe so. In the process, we will use August Gold Charts.

August Gold

I am a believer in simple concepts.

1. For a market to be in a Bull Trend, prices should be over, not under "key" Moving Average of Closing Prices
2. For a market to be in a Bear Trend, prices should be under, not over "key" Moving Average of Closing Prices
3. Bull Chart Patterns are one of "Higher Highs and Higher Lows"
4. Bear Chart Patterns of ones of "Lower Lows and Lower Highs"
5. Often, when a strong price trend sets in, both Weekly and Daily Charts are in sync with the same chart pattern
6. Seasonal price tendencies do play a role in the strength of trends most of the time, but not always
7. Markets respond to becoming: Overbought and Oversold conditions

These concepts apply in my opinion to all charts, regardless of their type. Daily, Weekly, Monthly, Hourly, Minute, Bar, Candlestick and so on. The concept of what constitutes a trend stays pretty consistent.

With this in mind, let's take a look August Gold on both a Daily and Weekly basis.

Years ago I created a Technical Study called Swinglines. They are shown as the bold "Yellow Line" on the above chart. Swinglines detect trends and the dollar risk associated in being either "Long or Short" a trend at a given point in time. This concept is taught in great detail on our trading course called "The Futures Academy".

The concept on this chart is easy to see. The market has been making lower lows and lower highs since May 10th. If prices get over this past Tuesdays' high of 668.2, this pattern will be broken and the current downtrend will no longer be in place.

The question than is; "Is an Uptrend developing"? The answer would be not yet. Here's why.

1. Even if the chart pattern switches over to one of making higher highs, prices remain under the all important 18-Day Moving Average of Closes, currently at 672.4
2. The current seasonal tendency of this market is down until mid-August according to historical studies provided by the Moore Research Center (MRCI). While the MRCI Report covers December Gold, August doesn't depart enough to not be affected, assuming the seasonal trend works this year. In 13 out of 15 years the seasonal effect has worked.

In the above chart, the best I see a move back up to the 18-Day Moving Average of Closes, the red line. It is at that number I expect to see prices stall out, assuming the market rallies and breaks the current downward chart pattern as depicted by the yellow Swingline Study.

Right now gold does have an important technical ally. It is the Stochastic Study which just today turned up. When Stochastics lose their embedded status (that of the K and D line staying under a 20-reading for 3 consecutive days) prices tend to rally backup to the 18-Day Moving Average of Closes. Think of this as a pressure cooker releasing pressure. The "pressure" alluded to above in this case is the break in prices from 699.7 down to the most recent low of 657.5. The release carries back to a "neutral point", in this case possibly the 18-Day Moving Average of Closes.

Below is the Weekly Gold Chart. It too has interesting story.

First, the Weekly Chart is not in sync with the Daily Chart. The most recent low is 636.7. After that low was made, prices rallied up to 692.5 and since than have broken down. This looks to be the first "Up Week", a week over week rise in prices over that past 4-weeks.

Second, the Stochastic Study has worked itself out of being overbought.

Third, prices for the past month have stayed well under the 18-Day Moving Average of Closes, as shown in "red".

Fourth, at this time the most I think you should hope for is a move on this chart back to 666.7, the current 18-Day Moving Average of Closes, before resistance is seen.

Conclusion and Recommendation

I still see no reason to get excited about the prospect of sharply higher gold prices at this time and see little reason right now to get bearish. What I see is a bounce taking place right now in a market that as of June 5th begins to display a historical seasonal tendency to break until mid-August. Seasonal tendencies do NOT always work, so you should never trade just using them. They are but a guideline.

However, an all important factor is that prices on both the Daily and Weekly Charts are both trading under their respective 18-Day Moving Average of Closes. This is not bullish, it is a bearish.

The fact that the Weekly Chart has not turned down in terms of the Swingline study at this time means that prices breaks on the Daily Chart will most likely be moderated.

Until prices close back over the 18-Day Moving Average of Closes on either chart, I think you look for selling opportunities on the Daily Chart. As prices are starting to correct to the upside, I expect a sell signal to develop within days, close to wherever the 18-Day Moving Average of Closes is at that time.

 

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Silver

The Daily Chart of July Silver is in an uptrend. Using Swinglines as described above in the gold section, makes it easy to see that July silver has a chart pattern of higher highs and higher lows in place.

Unlike gold, silver has support and looks to be a buy on a price break back to the 18-Day Moving Average of Closes, currently near 13.20.

Let's look now at the Weekly Silver Chart to see what stories it may be telling.

Unlike the Daily Silver Chart, the Weekly Chart has a bearish chart pattern, one of "Lower Lows and Lower Highs". As you can see on the chart above, prices have rallied back to the 18-Day Moving Average of Closes, 13.47 where I expect to see prices stall out.

Recommendation

The Daily and Weekly Charts in Silver are fighting themselves. The Daily Chart is short bullish and getting overbought. Prices have rallied nearly 80-cents in but 4 days. I don't expect this to last.

The Weekly Chart is saying that prices near 13.47 are now at resistance of the 18-Day Moving Average of Closes. When markets rally up to the 18-Day Moving Average of Closes, the 18-Day Moving Average of Closes often acts as resistance.

When prices fall down to the 18-Day Moving Average of Closes, the 18-Day Moving Average of Closes often acts as support.

What market technicians typically want is for the Daily and Weekly Charts to be in sync, not fighting each other as is now the case.

The current chart formation requires a move over the most recent high on the Weekly Chart of 14.11 to be taken out before the trend turns up. While possible, I think it highly unlikely. What I think will soon occur is that prices will break down soon. The Daily Charts will try to get back down to the 18-Day Moving Average of Closes while the Weekly Charts will, if this occurs have the chance of forming a top against the 18-Day Moving Average of Closes.

If prices break down, eventually this chart pattern would setup a long-term buy signal.

Right now, a short term buy is fine against the 18-Day Moving Average of Closes on the Daily July Silver is fine, if you are willing to risk a break back under the most recent low of 13.085. If Stochastics get over 70, wait and do not buy until Stochastics correct back under 70.

I will keep all interest in Silver updated on my nightly Audio/Video's and daily market commentary reports as to what my thoughts are.

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