Well, another week has passed and another potential bullish pattern goes down the drain, as the support I mentioned in last week's analysis broke down. Yet, since the market has not yet broken down below its December 2011 lows, there still remain some bullish possibilities within this patient, but it does seem that it has now been placed upon life support. So now we are left with one last potential bullish pattern, upon which it is hard to place any significant reliance just yet. Yet, with the market seemingly not wanting to break down, it remains a possibility.
In truth, I do not know of a single metals analyst who has not been stopped out for a loss AT LEAST once over the last three months if they have suggested a long position, and many even multiple times. In fact, many analysts who have suggested shorts have been stopped out numerous times as well. But with a consolidation like we have seen over the last months, I truly cannot blame them, as this pattern has truly tested even our patience, and we have not even fully stopped out yet after going long again in the 29-31 region in silver and the 151 region in GLD. We have simply been waiting for confirmation from the market as to whether it is heading to new all-time highs, or if it will break this potentially bullish pattern.
From the fundamental perspective, we are hearing rumors about Spain being required to put up its gold as collateral for this $100bn loan. Imagine the potential impact upon the price of gold in that scenario. Furthermore, many are expecting China to attempt to further stimulate their economy due to their weaker than expected internal consumption, which would also be seen as positive for the metals.
For those that are concerned about "missing the boat" on the big metals rally that may begin, you need not fret, especially with this current pattern set up. Most often, when we see this current pattern set up (known as a leading diagonal), we will most likely see a strong and deep retracement which will allow us to buy additional long positions.
So, for now we are left waiting, once again, for the market to either prove it is still bullish or if it will break below the December 2011 low, which would then tell us it is still within a larger corrective pattern. But what we must now see is a move to a new high in each of the metals, which would now mean GLD ideally over 160 and silver ideally over 30.00. Moreover, due to this pattern which has developed, such a move may trigger a buy signal, but the actual buy order should only be placed upon a deep retracement.
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Disclosure: I am long SLV.
Additional disclosure: I am long SLV with OTM options expiring late in 2012, and with shorter term OTM hedges.