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 ventually, 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, everal 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 held, for December. 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 informative.

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 activity.