Monday Evening 9 January 2012
The first and foremost consideration when viewing any chart is to
determine the trend of the time frame under consideration, and
then be aware of the next higher time frame, as well. Starting with
the strength in precious metals, gold's trend remains up. We drew
a trendline off the 2008 lows to not only show that it is still holding,
but also you can see it has been tested several times, along the
way. When, or if, the trendline is broken, it will be more significant
and likely lead the way to a larger correction.
September was an Outside Key Reversal, a higher high, lower low,
and a lower close. October and November attempted to recover,
but a sell-off re-emerged in December, second to last bar on the
chart. It is interesting to contrast the two. December's bar is much
smaller and the close is lower end when compared to the location
of the September close.
By doing a factual analysis, we can come to some logical conclusions.
The smaller range tells us that buyers were present, preventing price
from going lower than it did. The location of the close tells us that
sellers were in control. As of the end of December, one would expect
to see downside follow-through, but so far, that has not happened.
Price did stop at the support trend line, but the key observation is
just how little the December low went under the September low...just
barely. That begs the question, "Where were the sellers?!" This is
continued in the weekly chart, next.
That fact of how price went lower, barely, reveals important
information. There were no resting stops to be triggered, or very
few, and most importantly, the lower price did not trigger new selling.
There was none! Here was an opportunity for sellers to rout buyers
and drive price lower, but it never happened. We mentioned above,
buyers were present to prevent the range from extending lower, and
sellers were AWOL. That lack of downside proves that observation.
This is a bit more subtle, but it adds to the significance of the
potential hold in gold, at least for now. To the left of the September
low, there was a small, sideways correction in May and June. The
fact that that "correction" was sideways and not lower tells us the
market was strong, at that time. The low of that congestion correction
is above the last swing high from November 2010 through January
2011, leaving spacing, confirming the strength of the then ongoing
trend. It is no accident that the decline in September, and then again
in December, stopped at this area.
Will it continue to hold? No one knows. We can only deal with
present tense information, and right now, the market says that
support is holding. This can change tomorrow, or next week, or
later. As long as we can read developing market activity, clues will
be provided to confirm or negate the facts as they are known as of
We have added a down channel off the highs of September and
November, and then drew a lower line parallel to it, starting at the
September low. The purpose of a channel is to see how price
behaves in between the supply, [top channel line], and the demand
[bottom channel line]. What we see here is price holding about
half-way in the channel and not working lower, which is often the
case in a down trending market. We now need to see if price can
continue to move back to the upper line, and then observe HOW
price responds to it...break it to go higher, or stay contained and
The daily provides a clearer picture of the failed probe. Note how
that low bar is smaller than the one before it, and how the close was
mid-range the bar. The close tells us who won the battle between
buyers and sellers. It is a neutral close, but balance to buyers for
stopping sellers cold at a point where sellers should have
dominated. Since the low, gold has made an impressive rally from
a weak position. After three strong bars up, there has been a kind
of sideways to higher "correction," telling us sellers are absent.
What will be important to observe, going forward, is how gold
handles resistance just under 1650. There was a sharp jump in
volume when gold sold off on that wide range bar down. Whenever
there is an abnormally large increase in volume, it is an indication
of a substantial battle between buyers and sellers, a transfer of risk.
Smart money sells highs and buys lows. Would you surmise that
smart money was selling that day?
Logically, we can infer the transfer of all that volume at a low area
went into strong hands, and that is why price did not go lower last
month, and that is why there were no stops or new sellers under
the September low. If we are leaning in the right direction in
reaching these conclusions, it means gold may very well hold these
lows and continue to work higher.
What is also of consequence how the December low, under
discussion, occurred on the quarterly, monthly, weekly and daily
charts, creating a synergy amongst four different time frames acting
in unison. This kind of synergy does not happen regularly, so when
it does, it deserves close attention. Adding that high volume bar,
just prior to the low, as being a transfer of risk from weak to strong
hands, and we do not know of other analysts drawing attention to
that day and its significance, December may well have been a
perfect storm for gold.
If there is merit in the presentment of the surrounding facts in the
gold chart, we should begin to see more confirmation in price and
volume activity, such as we are seeing right now, with a sideways
to higher price correction, instead of one that retraces a part of a
preceding rally, as we will see in silver.
Continue to be a buyer of the physical that can be held personally.
If you learn anything from the MF Global theft, it is, trust no one.
Ask the numerous MF Global customers that have lost
SEGREGATED account contents, if proof be needed, beyond
common sense from watching the other world debacles unfolding
Silver will move more quickly because of the groundwork laid in the
gold analysis. Despite silver being weaker that gold, and having
taken such a beating, you can see from the monthly chart that
spacing still exists. Spacing, in a bull market, exists when the last
swing low, December 2011, stays above the last swing high, March
2008, creating a space between the swing high and swing low. This
tells us that buyers are not waiting to see the last swing high tested,
but are buying the market at current levels. Spacing is an indicator
of market strength.
We will call the monthly chart weakened, a trading range instead
of an up trend.
As we drill down into more detail, on the weekly chart, we see a
similar scenario to gold. Silver has successfully twice retested the
support from the last swing low from January 2011. Compare the
range of the two sell-off bars in September, when price broke from
40 to the 26+ area, with the ranges of the most recent decline to
retest the 26+ area. At both the September and December lows,
the close on each bar was above mid-range, telling us that buyers
were overcoming sellers and supporting that area.
In contrast to gold, silver is just below the mid-range of the down
channel, where gold was above, but silver has not dropped to the
lower channel line, as is normal in a declining market.
The more times a line is tested, it is weakened. Silver has been
pushing up against the supply line off the September high. Instead
of a clear downtrend, silver has morphed into a trading range. We
see the same high volume bar in mid-December, a transfer of risk
from weak to strong hands, and at the December low, the probe
that went under the September low is almost non-existent, telling us,
as it did on gold, there were NO sellers under that price level...that
translates into support.
The number 24 on the chart is the number of days it took to rally
from the September low to the October swing high. It then took 42
trading days to retrace the same ground. In other words, the
decline lower was labored, not what you would expect in a down
market. There was no ease of downward movement, as you would
expect in a down market, and as we saw in September, from the high.
All we are doing is looking at the market, extracting the factual
information from the price/volume behavior, putting seemingly
unrelated pieces of information together, like a puzzle. The
individual pieces may not reveal the whole picture, but once
assembled, there is greater clarity
Buy physical silver that you can hold on your own. Do not count
on taking delivery from paper-held transactions. Look no further
than MF Global to know why. And from the way the MF Global
disaster has been handled, do not look to the CME or CFTC for
any help when more of the same develops, as it will.
One more little observation about silver. We mentioned how the
"correction" response from the 3 day rally has been a sideways to
higher "correction, really a consolidation in gold. See the last of the
3 day rally in silver, on the daily chart, 5th bar from the end? Look
how the current correction in silver has taken four days to not even
be able to retrace the gains just from that last bar, and there were
two strong rally days behind that one, a rally from weakness, or
should we say, apparent weakness. Considering the high volume
transfer of risk transaction from mid-December, the market was
already in strong hands.
As in gold, what we need to see, moving forward, is more
confirmation supporting the interpretation of developing market
activity, as we see it. Watch the last low in gold and silver. They
may be more important than most people realize, at this point. It
takes time for markets to turn. Let is see if this turns out to be the
proverbial first swallows returning to Capistrano.
Always remember, we could be wrong, and we can yet see lower
prices. We will know that by the way in which downside activity
develops, and that would be in the form of wider ranges down on
increased volume, taking out support with impunity. Until we see
that, we are sticking with the context as presented.