The Rally This Week Is Important to the Longer Term Picture
Normally I spend a considerable amount of time writing about the past week’s events. This week I won’t because something more important is going on. For the first time in a long time the gold and silver market are not being influenced by either energy or the Dollar.
As I am writing this report, Crude Oil is down nearly $3 and Heating Oil and RBOB Gasoline are both down about 10-cents. I would call these fairly sizeable price breaks. What’s most important is that in the short-term, both Heating Oil and Gasoline are in downtrends. Yes, in short-term downtrends. The longer-term trends remain up, but the short-term trend is down. Something we haven’t seen in a while.
While this is going on, the September Dollar Index remains mired near 74-cents. So, a break in energy and a rally in the Dollar Index are temporarily not impacting gold nor silver….which is a change.
The Gold Seasonal Story
This story and the historical momentum of gold is shown on the Seasonal Gold chart displayed below, provided to us by the Moore Research Center…www.mrci.com
The Seasonal Chart below shows what Gold has done over both a 15 and 34-year time span in term of price momentum. I use the comparison to view and compare longer-term historical data versus shorter-term, more recent data.
As you can see, a mid-month rally in gold is very common. The ensuing break into the end of June, should it develop is where I wish to establish a long term position. If my analysis proves correct, I think new all time highs in gold will be hit before year end.
Last week I said, “Yes we should expect to see both rallies and breaks throughout the summer. No we should not expect a dramatic move up to begin before the fall months arrive and during all of this, I expect the Dollar to maintain an upside bias unless something negative happens to either our banking system or energy prices. It’s that simple.” I don’t yet have a change of heart.
August Gold
August Gold changed from a short-term downtrend as portrayed in last week’s report to a short term uptrend in this week’s. This does not surprise me as I am looking for this rally to create an eventual setback on which I will look to establish a long term position in gold. Look at the chart below.
The Slow Stochastic Study (SSTO) is now getting close to becoming overbought. Last week at this time it was oversold. A reading over 70 is overbought and as of the time of this writing, the “K” line, the red line has a 65.74 reading.
Support is back at the 888.7 level, the 18-Day Moving Average of Closes as labeled on the above chart. The key on the pullback will be to see how prices hold up going into early July. How deep the eventual price correction is will tell the story. If the last and most current break low, just under $865 holds up, that will be in my opinion very bullish, as cutting through overhead resistance will not come from prices under or near $852, the last low on this chart.
Conclusion and Recommendation
Between now and early July, which is only a couple of weeks away, I intend on establish a long call spread position in gold. I may go to the December Contract to ensure that time is not an issue for my trading strategy.
The reason I am bullish and wish to employ this type of limited Dollar risk strategy is in part due to my desire not to be overly concerned with day-to-day gyrations while being able to play the longer term seasonal cycle.
Frankly, I think the big picture that few are mentioning is “Stagflation”, which I define to mean a sideways economy and increasing inflation. My guess is that market “surprises” will most likely come from: unknown banking or brokerage company issues which may “jolt” the US Banking System, interruptions to energy supplies and general inflation threats.
Silver
Like Gold, Silver often breaks into late June, but unlike Gold, Silver often bounces hard in July. Look below at the Seasonal Tendency of Silver.
July Silver
Last week I pointed out that Silver was becoming oversold. In fact, Silver laid a “Bear Trap” when prices while oversold broke though support at $16.50 and broke down to $16.25. The break did not scare out the longs. All it did was capture those who were short selling in anticipation of weak longs dumping their position once the $16.50 gave way.
Like gold, silver is now close to becoming overbought and is running into resistance against the Bollinger Band Top of 17.39.
Lets look at a chart of July Silver.
The technical picture is identical to that of Gold. Prices are near the Bollinger Band Top, which is the first important resistance level. Seasonally speaking, prices should have in July another price break and possibly one after that in August. Gold typically doesn’t have two breaks like Silver does.
To get really bullish, prices have to get over the last top of $18.375. Without that, I believe that for the time being we have a trading affair.
Conclusion and Recommendation
As mentioned above, a “head fake” took place when prices broke down to $16.25 and dropped no further. I did mention that because prices were oversold, that Stochastics either embedded or the break was doomed.
Now that prices are up against the Bollinger Top, I don’t think purchases make sense. In fact, with the market nearly overbought, it’s possible we get a reversal that masks this last rally from $16.25.
Like in Gold, simply wait for a better opportunity to get long using a Call Option Spread Strategy. I will write more about that next week.
