GOLDReport

June 28, 2007

Observations

Last week in the "Observations" section of this newsletter I made mention that Japan would soon be criticized for not supporting their currency, the Yen. I had no idea that within days this theme would be picked up globally, but it was. It's too soon to know if any further market impact, other the short rally in the Yen we've just witnessed will be seen. The rally may prove fleeting as the Japanese Government doesn't seem worried about the Yen's falling value and the "West" has more important issues on its table. Given the impact a rising Yen would have on "carry-trades" I'm not sure many want to tackle this issue just now.

Gold and silver broke down hard this past week, as expected and noted in last week's Metal Report. The downside bias I have expressed in this report has proven accurate.

While both gold and silver are bouncing today, I don't expect a change of trend to quickly take place in either. Each of these markets has to first begin the process of forming a bottom. While a $10 rally off the lows in gold and a 35-cent rally off the silver low is nice, a bottom hasn't yet been confirmed on either market's chart. Rather, both of these markets recently became seriously oversold and are bouncing to correct that condition. Having crude oil rally $1 a barrel today is also providing some inflationary support.

As you will see in the charts shown below, the trends in gold and silver are down and oversold.

August Gold

Currently both the Weekly and Daily Chart Trends in gold are down and into oversold territory with a Daily Stochastic Reading of 25.64. As mentioned for several weeks now, the seasonal influence of the gold market at this time of year is one of bearishness, through early August. Given the price break we've already seen, this could change at any time.

What's important to understand is that without some catastrophic event, Bear Markets rarely turn bullish on a dime. Rather they go through a metamorphis of "Bear Market" to "Neutral Market" back to Bear Market or onto a "Bull Market". At best we might be making a bottom, but most certainly have not entered into a Bull Market and may not yet even be Neutral.

Let's look and review the August Gold Daily Chart below to better understand my reasoning.

Stochastics are oversold with a reading of 25.71. When Stochastics are this low and without a reading under 20 this indicates to me that at anytime the market may rally, in an attempt to correct an oversold condition. Given today's $6 rally, an attempt at correcting the oversold condition is underway. The key here is the word "attempt" because so far that is all that this is. Should the Stochastic reading get over 30, the "attempt" will become one of success. It is important to keep in mind that Stochastics portray current market momentum and do not in and of themselves determine a trend. They simply portray current market momentum.

The purple channel represents what I believe to be the "Downtrend Slope". In other words the Downtrend Channel I believe to be at work on this chart. It is easy to see and has been in place since I wrote my last Metal Report on June 21st.

Resistance is currently at the 18-Day Moving Average of Closes, 657.6 which matches up well with "purple downtrend resistance line, the downward slopping top purple line, which at this time intersects this chart at 656.

The "last rally high" was made at $659.5 on June 25th. I have labeled it with a Down Arrow for you to easily see.

An Uptrend, another word for a "Bull Trend" takes place when a market makes "higher highs and higher reactionary lows". That is not what is at work on this Daily August Gold Chart, nor is this pattern at work on the Weekly Gold Chart. What is at work on both is a pattern of "lower lows and lower reactionary highs", in essence a Bear Chart Pattern.

In last week's letter, I projected a low to occur near $646.1. The actual low turned out to be 641.1. As most know, the markets are dynamic in that each moment they are open prices often change. As prices change, the technical indicators I use change as well.

I say this because if I were writing a daily Metal Report daily, the low made on June 27th could have been easily projected. Look on the chart above. Look at the Bollinger Band and where Wednesday’s low came in. Once the Bollinger Band Bottom Line, the one in white above was hit, the downside price target was met. Given the oversold condition of the Stochastic reading, today's rally is of no surprise.

Conclusion and Recommendation

Until $659.6 is hit, the trend remains down. My guess is that if Stochastics get both their K and D readings, the yellow and red lines over a reading of 30, the market will once again be a short sale with a tight stop at $659.6. The downside target at this time would be the Bollinger Band, again.

To become Bullish on gold, I believe prices need to rally through $659.6. Even if this occurs I still would not run out and get long since the only place for a stop would be under the most recent low, which is $641.1 which would result in a risk of nearly $1800 per contract.

However, if prices got over $659.6 it would mean that a pattern of higher highs was in place. We'd have to wait for a correction to comment on the lower low part of this equation, but at least part of a bullish scenario would be in place.

In summation, the market is still a better short sale than a buy. This would change if prices got over $659.6.

 

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Silver

Silver feel harder and swifter than gold and to make matters worse, it can easily begin another leg down...now.

To explain this better, lets discuss how I use Stochastics. When both the yellow line , the K reading and the red line, the D reading stay under 20 for 3 consecutive days, I say that the market is internally gaining strength to the downside. In other words, the Bear Trend is getting stronger. As of today, 2 days of this have occurred. Tomorrow is the key day. To avoid the third day, silver needs to rally, right now. If it doesn't the odds strongly favor more downside.

If Stochastics do turn up, with the red line getting a reading over 20, prices could rally back to the 18-Day Moving Average of Closes, currently 13.22. This moving average is a falling right now by about 3-cents a day. Therefore, I would adjust my daily upside target by at least that amount daily.

Recommendation

I would rate the chance of silver instantly turning into a Bull Market at less than 1 in 20. In other words, a hard rally will be a selling opportunity.

The last rally high was 13.32. The 18-Day Moving Average of Closes is currently 13.22. The resistance is between these two numbers.

If Stochastics embed, a quick test of $12.00 is in the card.

I will update my thoughts on this chart nightly in my Nightly Audio/Video which is available in the research area of our website.

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