Saturday 1 February 2014
So far, January 2014 has become a part of the failed rally for gold and
silver that was so widely expected in 2013. That has not stopped the
renewed enthusiasm for 2014 being THE year for the long awaited
rally-to-the-sky. Anyone who reads our commentaries on a regular
basis knows that the most reliable source for what the market will do
comes from the market itself.
The contention here is that almost everyone's focus is misplaced, and
the reasons why gold and silver remain at low levels are not being
given their proper due. It has to do more with the battle for world
supremacy than anything else, a topic for another time.
The fundamental news has not changed. In fact, the shortages for
gold and silver increase with each passing month, and with each
passing month, the MARKET has been telling a different story, as in
the trend remains down. Before gold and silver can rally, they first
have to stop going down.
It is not that the fundamentals are flawed; facts are facts. The biggest issue has been one of timing, and unless and until you see a huge rally over 1400 in gold and 26 in silver, you are likely to see February and
March pass along like January just finished.
Not everyone is interested in charts, we accept that and can
understand why, given the way many charts are presented, more for
sensationalism to back up a catchy headline for an article than for
realistic content. People who make predictions are blowing smoke in
the readers face. All the "predictions" for 2013 should be sufficient
proof, yet the pattern has already started to be repeated for 2014.
Not everyone can properly read a chart. It takes years of concerted
effort, and most people want easy answers in a few brief sentences.
What almost everyone has is common sense, and the markets are
replete with logic that makes sense. It can often take an art form for
analysis, but if you are willing to put aside any predisposition about
looking at charts as a waste or too foreign to understand, then try to
follow the logic of what is presented, and you will have a more realistic understanding of what to expect, moving forward.
We have 8 charts, 4 for gold and 4 for silver. At no time will there be
any discussion of any fundamentals, severe shortages, calls for much
higher prices, etc. The charts do not show any of that, at the
moment. In fact, they tell a story that makes sense. The story may
not appease the need for hearing how gold and silver are going to be
X amount higher, sometime soon.
History is on the side of failed paper fiat currency, while gold and
silver being among, if not the best assets to succeed in a big way in
the wake of paper asset demise.
The two down sloping TLs, [trend lines] show market direction, or
trend, and we know logically that trends perpetuate and only change
gradually, for the most part. There is a 50% line shown on the chart. Generally, when a market cannot regain above the half way mark
within a trend, it tells you that the trend will continue, directionally.
Wide range bars and stand out volume bars are important market
tools. Very often, a wide range bar will contain future price
development for some period of time. Last June was a wide range
bar, shown on the chart. All of the past six months have been trading
within the high and low of June's range. The point is, when you see a
wide range bar on a chart, the probability is for price to be range-
bound by it for several periods into the future.
Another way charts inform is by observing how many bars in a rally,
and how may bars it takes to correct the rally. From the June low,
there was a 2 bar, [2 months] rally. The correction, or retracement of the rally took 4 bars, or twice as long. This tells us that it was easier
for buyers to rally the market than it was for sellers to force it down,
taking twice as long. This piece of logic tells us buyers are stronger
than sellers, at that point in time.
The opposite of a wide range, which shows ease of movement, is a
small range bar, one that makes very little directional progress. The
last bar in the decline had the smallest range. What that tells us is
that buyers were more than meeting the effort of sellers, and that
effort on the part of buyers prevented the range from going lower.
From that, we know demand is in greater control. If demand is in
control, the market should rally.
Essentially, what we are doing is putting little pieces of a puzzle
together that should tell some kind of story.
No matter what you hear or read about gold and the prospects for
substantially higher price levels, the trend is down, exactly opposite of what you know. When you compare what you know, an opinion, with
what the market is telling you, the market is a more accurate
measure, however counter-intuitive it may be to your opinion[s].
We can see from the weekly charts that gold remains in a relatively
weak status. It is both under the TLs and the 50% mark. However,
there was an interesting development in the weekly range just ended. We said sharp increases in volume can be important. Last week was
the highest volume since the June 2013 low. There is not a
substantial difference in the two volume levels, yet compare the range for last June with the range for last week.
Last week was about 1/3 the size of the June bar. Here is where logic
come in. If there was almost as much volume last week as last June,
but the size of the bar was so much smaller, then we can gain an
insight into the character of the market. The same volume effort
produced less downside results, and not a wide range lower as
occurred in June.
This is a red flag. Why was the range smaller?
Because buyers were much stronger than sellers and this prevented
the range from extending lower. We are getting information from the
market that says sellers were unable to push price lower, as they did
last June. If buyers can sustain that caliber of effort, it will lead to a
rally, and eventually, a change in trend.
Changes in trend appear on the smaller time frames first. Price is
under the TLs on the monthly and weekly charts. On the daily chart,
below, price has broken the TL down and is now moving sideways.
The lead month for gold futures is now April, so the previous volume
activity was stronger in the February contract, and the volume prior
to last week is not reliable, as viewed on the April chart.
There was a wide range bar to the upside, [arrow 1], and that
indicates ease of movement to the upside. It started a 3 bar rally,
followed by a 5 bar decline. In other words, it takes more time and
effort for sellers to correct the last rally. Look at the high volume for
the bar [at arrow 2], and it is a relatively wide range bar lower. What
would be expected is for the downside momentum to continue, but
that did not happen, as we see in bar 3. This is also a red flag,
alerting us to a market imbalance.
In fact, we took a small long position near the close on Friday, for
reasons just cited, and also from looking at an intra day chart, not
shown here, but we do have one for silver.
NUGT is a 3X bullish gold ETF. We took a look to see what the market
sentiment was in that more leveraged arena. When we last looked at
it, several months ago, it had flat-lined. There appears to be some
change in sentiment over the recent few months.
What stood out in price was how the market hugged the lows, and
January turned into the opposite, as price was now hugging the
resistance area. The long price holds, without backing away lower, the odds favor an upside breakout as buyers are absorbing the sellers.
The volume backs up the price activity. During span "A," while price
was in decline, volume was relatively lower than when price
subsequently rallied during span "C." This tells us that demand has
been greater as price rallied, a bullish development. During span
"B," volume was at the relative highest, and this tells us smart money
was accumulating long positions, in preparation for a mark-up phase.
The stage is being prepared for some kind of rally in gold. We do not
know how much of a rally, in advance. Instead, we look for signs of
buying activity, like the absorption in NUGT. Once price breaks out to
the upside, that would be the trigger to be long ETFs and futures.
Anyone buying paper futures, based on the very bullish fundamentals
for the physical, has been taking a beating, as it were. By simply
paying attention to the trend and other pieces of market information,
there has been no reason to be buying futures. A read of what the
charts have been saying has kept one from taking unnecessary risk
exposure and losses in trading.
The same market logic prevails in silver as we just saw in gold. The
very small range for December was a red flag bar, a warning to sellers that buyers were stronger, evidenced by an inability for sellers to
extend price lower in a down trend. This is a clear market message.
January, last bar, failed to continue lower as it formed a higher high
and a higher low. We take that information to see how it translates on
the next lower time frame.
By itself, last week's performance suggests price should go lower. A
look at the next lower time frame, a daily chart, should be more
Clearly, silver has been locked on a TR since mid-November. A
question that arises is, why have not sellers been able to push price
lower? Activity for the last half of January shows a labored effort by
sellers. It is taking twice as long to decline as it took to rally, and
that suggests buyers are in greater control down here than sellers.
We do not often show intra day charts, even though we watch them
closely every day. A long position was recommended at the end of the day. The intra day chart better shows why.
You already now know that wide range bars and high volume bars are
important to watch. At number 1, there is both, combined. The
reason high volume bars are so important is because the volume is
generated by smart money usually seeking to establish a position.
Smart money buys low and sells high, and it is the public that is
always on the other side of the trade.
The analysis is labeled and explained on the chart. We leaned on the
high volume and wide range bar as a reason to take a long position.
With price so near the bottom, we are able to keep risk low, in the
process. A rally above 19.20 - 19.30 will confirm the analysis, which
is nothing more than a process of applying logic to developing market