Archive for the ‘Precious Metals’ Category
Market Update 12/10/09
The talking heads at CNBC are at it again spreading rumors of a big dollar rally coming and with it a subsequent sell-off in commodities and possibly the stock market. The question is has anything technically or fundamentally changed in the last week to alter the trends that are currently in place? From a fundamental point of view it appears that nothing has changed. According to Fed Chief Ben Bernanke interest rates are going to stay low for some time and the U.S. and other governments are going to continue to print as much money as is necessary to keep the world wide economy afloat. I do not see the recent problems in Dubai having any significant impact on the market. The total amount of loans in question there is about 80 billion dollars and while by itself that is a lot of money, compared to the trillion dollar deficits that are being run up by world governments we are talking pennies, nickels and dimes.
From a technical point of view nothing has changed. The U.S. dollar is still in a downtrend and its recent rally is merely a bear market rally off the bottom of its downtrend channel while Gold and the U.S. Stock Market are still in an uptrend. The dollar managed to rally only to the mid-point of its upper channel, something it has done numerous times in the past few months, and the stochastic is approaching overbought levels.
Here is a 2 year chart of GLD that I have broken into 4 trading channels labelled 1-4. Since last November GLD has traded primarily within channel 2 and its recent break out pushed it to to the top of channel 3. It has now corrected to the bottom of channel 3 and it is approaching an uptrend line that connects the price lows from September. This coincides with the 50 day moving average that now sits at about $108. While GLD is 1/10 the price of an ounce of gold, there is about a $2. difference due to embedded fund fees so this price corresponds to approximately $1,100. for an ounce of gold. The stochastic for GLD is in oversold territory and the MACD has crossed over negatively but it is well above 0 and the moving averages are trending higher. Around these price levels looks like a good buying opportunity for GLD as the next move up should push it into the 3rd and 4th channels yielding a gold price in the $1,300.-$1,500. per ounce range.
Oil presents another interesting chart. While on initial appearance it looks like it has broken down from a bull flag pattern, if we take a closer look at it on the 3 month chart we can see that it has culminated in a descending wedge. Many times this pattern signifies the end of the correction. Since Deutsch Bank just predicted $60. a barrel oil and with the stochastic in oversold territory I will take the contrarian point of view. I believe oil is going to rally and will be trading in the $80.-$100. per barrel range sooner than anybody expects it. If oil does break below $70. per barrel then Deutsch Bank may turn out to be right after all.
The price of oil should be monitored carefully for cues as to where the stock market may be headed as it presents a catch-22 situation. When oil is less than $75. per barrel there is no financial incentive for oil companies to drill for more oil as the cost of exploration exceeds $75. per barrel. If oil is greater than $75. per barrel it is bad for the consumer and businesses that rely on it as the cost of gasoline will rise thereby increasing business costs. Since oil production and exploration were put on hold for most of 2009 due to depressed prices and the recessionary economy, we should eventually see higher oil prices due to increased worldwide demand and decreased supply.
Conclusion: The trend of the stock market, gold and commodities heading higher and the U.S. Dollar heading lower is still intact. I view this pull back in commodities as a normal correction and a buying opportunity. Traders and investors are waiting for the “right price” to jump back in and when they do expect the next leg up in the markets to be fast and furious.
It’s A Scary Halloween In The Markets
After yesterday’s big run up the market apparently suffered from indigestion and gave a big belch today. A belch is good after a large rally because it relieves the pressure that has been building up inside. Interestingly enough, GLD initially sold off but then recovered to close higher than it opened. The U.S. Dollar rallied but did not make it to the top of it’s downtrend channel as it did yesterday. While the S&P has broken below the bottom of its uptrend channel, the Dow has not quite hit the bottom of its uptrend channel.
The only new chart I will present is that of the VIX as this is the most important indicator to watch. If we take a look at a 2 year chart of the VIX you can see that it has rallied right to the top of its downtrend channel and that it is just slightly below its 200 day moving average. A large spike up in the VIX generally indicates the end of the sell off and this spike was of historic proportions. The VIX stochastic is also in very overbought territory. A further spike in the VIX above this level however could signal the beginning of a trend change.
The stochastic on SPY is in very oversold territory and is giving a buy signal as is the stochastic on GLD. While the MACD on SPY and DIA is still well above 0, since July it has been oscillating with a decreasing amplitude as the market has been rallying. Everybody still has in the back of their minds the horrible stock market crash that occurred last October and many talking heads are expecting further selling. The technical indicators are indicating a move up and today’s price action on SPY covered the entire width of it’s bull flag pattern that is still intact.
Monday is Nov. 2 and the start of positive seasonality for the stock market. Warren Buffet says that you should buy when others are fearful and since the U.S.A. had excellent GDP growth last quarter it appears that the economy is really recovering. There are also plenty of doomers and gloomers who don’t believe the stock market rally is for real but do believe that the economy is actually getting worse. On top of that are the money managers who missed out on the rally and wish to show good performance numbers for the year. Since there is still a gigantic wall of worry to climb, if the VIX stays within its downtrend channel then we should see another big leg up in the markets before years end. While Cramer and some other analysts believe the market has topped for the year, I think there is a strong possiblity that both the S&P and Gold will hit 1200 by year’s end.
Markets At Critical Juncture
I don’t normally issue a market update 2 days in a row but todays market action warrants it. The U.S. Stock Market, Gold, Oil and the U.S. Dollar are all at critical points on their charts. The S&P500, Gold and Oil are testing the lower limits of their uptrend channels and the U.S. Dollar is testing the upper limit of its downtrend channel. GLD in fact has closed slightly below it’s uptrend channel that has been in place since August. The $64,000. question is which way is the market headed next. For that information we should look at the technical indicators. The stochastics on the S&P, GLD and OIL are all in oversold territory while the stochastic on UUP is in overbought territory. The S&P and OIL are also flagging, another positive sign. While the stochastics have not yet issued a definite buy or sell signal, the levels they have reached appear to indicate that today’s sell off is actually a bear trap and a buying opportunity. The last time the S&P stochastic hit this low was in March 2009 and the market rallied big time. I suspect that the shorts are about to get squeezed hard and the S&P, Gold and Oil will rally to new highs while the U.S. Dollar will resume its downtrend. In the event this turns out not to be the case tight sell stops should be in place on all positions. While a market crash seems very unlikely, an S&P break below its uptrend channel could lead to 1000 or in the worst case a test of its 200 day moving average that currently sits at about 910.
Take A Look At Barrick Gold – ABX
Barrick Gold is the worlds largest gold company. They have just unwound their gold hedges and are expanding their operations worldwide. With the price of Gold hitting new highs it pays to look at the 800 pound gorilla in the room. Here is a 10 year chart of ABX. It looks like a large kite with a tail. ABX uptrended slowly until the middle of 2007 when it took off and ran to a new high of $54.74. It then quickly sold off to a low of $17.27 and has steadily moved up to its current price of $40.12. Since mid 2007 ABX has been trading in a gigantic diamond formation with the lower half almost a mirror image of the upper half. The low to high price of this pattern is $54.74 – $17.27 = $37.47. If we multiply $37.47 by 2 we obtain a price target of $74.94. Since gold miners have been lagging the price of gold they have plenty of room to catch up especially with the price of gold rising. A doubling of ABX in price from current levels does not seem unreasonable.
GDX Heading to $73. Per Share
Here is a 2 year chart of GDX the etf that tracks gold mining stocks. You will notice that it is almost identical to that of SLV as described in the post below. Since the March top of 2008 GDX has been trading in right triangle and rectangular patterns. It has broken through the hypotenuse of the major right triangle price formation and is in an intermediary uptrend channel. Volume has increased substantially on this ETF and momentum is turning positive on the macd at a high level. It looks like GDX is about to break out of its trend channel and eventually move to new highs. The projected price target of $73. is computed by subtracting $16.33 (the Oct. 2008 low) from the price that is equal to the shortest distance to the hypotenuse and then adding the result to that price. I have marked that distance with a line. That calculates to $45.00 – $16.33 = $28.67. $45.00 + $28.67 = $73.67. If this price calculation works out that equates to approximately a 50% return on GDX from it’s current price of $48.29. It took about 1.5 years for this chart pattern to form. I anticipate the move up to be significantly quicker.
SLV Heading to $25. Per Share
Here is a 2 year chart of SLV the etf that tracks silver. You will notice that since the March top of 2008 SLV has been trading in right triangle and rectangular patterns. It has broken through the hypotenuse of the major right triangle price formation and is in an intermediary uptrend channel that is now challenging the longer term uptrend channel from the Oct. 2008 lows. The last time SLV hit the top of this channel it pulled back only to the mid-point. In the meantime the macd and momentum appear to be turning positive at this critical juncture and volume appears to be picking up. It looks like SLV is about to break out of its trend channel and eventually move to new highs. The projected price target of $25. is computed by subtracting $8.76 (the Oct. 2008 low) from the price that is equal to the shortest distance to the hypotenuse and then adding the result to that price. I have marked that distance with a line. That calculates to $17.00 – $8.76 = $8.24. $17.00 + $8.24 = $25.24. If this price calculation works out that equates to approximately a 43% return on SLV from it’s current price of $17.44. It took about 1.5 years for this chart pattern to form. I anticipate the move up to be significantly quicker.
BUY GDX
GDX has corrected to its 200 day moving average which coincides with its uptrend line. The current price of 35.74 looks like a good buy. The initial short term target of this trade is about $47.00 but longer term it should trade much higher as gold keeps moving up in price.
Buy SLV
SLV’s 50 day moving average has crossed above it’s 200 day moving average and the downtrend from the July, 2008 top has been broken. An ideal entry point would be about $13. per share but I wouldn’t hesitate to start buying now. SLV is trying to break through an intermediary double top at around $14. per share. If it breaks through it looks like it can make a run to its old highs of about $20. per share. There are Jan. 2010 $13. leaps available that have very little premium attached so I would consider buying them.
Buy GLD
It looks like the bull market in gold is just getting started. The 50 day ma crossed upward over the 200 day ma signaling a bull market. Buy GLD. Leaps going out to Jan 2011 are available but premiums are high due to the volatility in gold so invest accordingly. Another possibility would be to buy DGP a gold double long etf. GLD is currently trading for around $90. per share.
UPDATE 6/5/09: GLD has formed 2 extremely bullish chart patterns. It has formed a massive inverse head and shoulders pattern that spans from March, 2008 until now and it has formed a cup and handle that spans from Feb, 2009 until now. It looks like gold is getting ready to bust through the $1,000. per ounce mark. The projected price target in the next leg up for GLD is $130. per share. Now is the time to add to your positions.