Precious points

Super Breakout!

“The move from a triangle e should be a powerful thrust that breaks out of the triangle. Though Friday's action began strongly, it stalled in the afternoon leaving the wxy alternate still valid. We'll know very soon which count is invalidated … it will take an impulsive thrust above $823 next week in the front month futures contract to rule out the triangle fake out. Silver also had a strong week, moving back above $14, but failed to win back all of last week's losses. Friday's rally failed to take out the previous day's high and closed back below the 50-day sma.”

~Precious Points: Bull Trap in Gold? December 22, 2007

The post-holiday trading week finally confirmed the long-watched fourth wave triangle in gold with an impulsive post-holiday move to last week’s preliminary target, leaving last week’s caution over a potential head fake timely and appropriate though ultimately unnecessary. But is it appropriate to stay cautious for at least another week now with everyone jumping on the bullish bandwagon as they eye the juicy 32% rise in gold over 2007 and the 15% rise in silver?

From a technical standpoint, gold still has room to run, at least up to the November high and probably beyond. And last week’s breakout in gold led a strong week for all the metals, with silver getting up almost 3% for the week alone and nearly 7% for December. So, whereas the technical picture in the white metal had been pointing lower, the recent performance in tandem with gold now supports a more optimistic outlook.

The chart above shows significant resistance in silver at $15. If this level fails again next week, the first test of support will likely be at the convergence of the down trend line and the 50-day sma, about $14.60. Gold has a decidedly bullish look about it, but it will take clearing $855 before some will finally put to rest any lingering suspicions of a deeper correction. An impulse in gold beyond that level would probably be matched with silver moving through $15.50 if not $16.

If that proves to be the case, conventional wisdom has it that commodities tend to create extended fifth waves, meaning the final legs of their bullish impulses typically push further than the minimum criteria for fifth waves. Gold having just broken out of a fourth wave triangle, some are thus raising their expectations in gold to $1,000 and beyond. With the Fed expected to cut further and housing continuing to deteriorate, the argument to support these targets is compelling. And while these are certainly legitimate long term targets, it’s far from certain they will be reached directly without some further consolidation first. In fact, with some calling for a rebound in the U.S. economy in the second half of next year, and summer typically the weakest season for metals, gold and silver have their work cut out for them and little time to do it if they are to achieve the lofty goals they’re now being assigned.

A more near term consideration for metals, though, is the tendency for currencies to stage trend reversals around the start of the new year. Clearly 2007 saw the dollar in a downtrend and, while many are not as bold as to predict much further recovery in the near term, there is still the possibility of getting positive retail news or some other such catalyst as to start a steady trend higher in the greenback come January.

Beyond that, we have a Fed that is likely nearer the end of its policy accommodations than the beginning. As mentioned here previously, the executive branch has stepped in to take some of the mortgage market and general economy burden from Bernanke’s shoulders, leaving him to focus more specifically on inflation and other long term considerations. Failing another acute credit market freeze, the fundamentals pulling down the dollar and prompting rate cuts are not likely to prompt the parabolic spike in metals some may now be anticipating.

Or perhaps just as likely is that we will experience some geopolitical turmoil or financial calamity that compounds with the bullish charts in the metals to create a perfect storm. But wherever the current impulse takes us, after that comes a fall. This is not to say necessarily the end of the bull market or even a catastrophic sell-off – depending on the strength of the rally from here, gold and silver may never again fall to prices seen just last month! With a timeframe extending out to the second quarter of 2008, gold can be expected to reach record highs, but the fate of the housing market, the economy at large, and other exogenous factors may still determine the extent of that move.

So it’s probably premature to say $1,000 gold is a sure thing, at least next month. Remember that 2006 ended with an impressive December rally only to see precious metals hammered at the start of January. And gold at least is further extended in its current move than in December 2006. If last week’s signal was the triangle in gold, then this week’s might be silver at $15. Also watch the dollar. There certainly seems to be some very good times ahead for holders of precious metals, but let’s just keep our wits about us and our eyes on the indicators before we go blindly assuming this is the big one.

Joe Nicholson (oroborean) www.tradingthecharts.com This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.

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