Today I'd like to touch a little bit on my intermediate term view on bull in precious metals, especially gold and silver. Gold, silver and gold miners are three industries that are moving in parallel almost all of the time. Of course, mostly up. Usually a strong negative divergence in any of the three can provide a clue that something may not be right and that we should reconsider our views.
What's happening now is that we have negative divergence in silver and miners, while gold is still moving steadily up. This by itself doesn't mean much. It has happened in the past that miners and silver have been lagging, but then broke out higher with gold. So to get an additional clue of what may happen in the near future we must closely observe each three by their price and volume behavior.
Let's see the gold miners first. First thing to notice is that GDX is now in an intermediate term downtrend as the pattern of lower highs and lower lows has evolved. Second, the volume pattern does not favor a push higher. The last two weeks' bounce resulted in wedging rally without a test and has a look of a snapback rally from highly oversold levels. A quick drop on strong volume confirms this view. It all looks like a January low around 52 should be taken out pretty soon.
Next, silver. It's a little bit difficult to say what's going on with the white metal. After a spectacular drop SLV experienced some very high volume bars and rebound, which was soon tested. Price then went slowly higher. This could mean a reversal. However, the rally that followed has been very week up to this point. Moreover, more distribution days and another mini wedging rally is clearly seen. I cannot clearly say what direction silver is aiming from here as it is caught in a non-trending mode. With all that overhead resistance it is hard to believe it will be able to enter a new uptrend without first shaking off all those weak holders.
Finally, let's see how gold is doing. It is by far the best looking chart of the three. After climax top in silver gold followed down but without any real distribution at the top. Volume increased on a way down, resulting in a short term selling climax which stopped a drop. That big red ugly candle was successfully tested and a follow through day commenced a two week rally that is still looking not so bad at all. There has been some distribution (a reverse hammer bar) followed for the next day, but it was quickly reversed and nov GLD is aiming at new all time highs.
I think silver will be a driver of the next leg down in a complete precious metals sector as it has obviously been most widely publicly accepted darling of the last bull run. And as long as there are any weak hands on silver, neither gold nor miners will be able to produce any convincing run. Gold may breakout into new highs, but I think this will be a nasty fakeout if it really happens. Not until silver becomes strong again will big money risk buying any large positions in gold or silver. I suspect gold will fall the least and when sector bottoms it could be the best buying opportunity of the trinity.
The final nail in the precous metals coffin may be the dollar. PM sector has never been able to rally into the strong dollar and it looks like dollar may be forming a double bottom reversal pattern. If the dollar ETF UUP successfully tests May lows and rallies on good volume, this would be a lot of oil to PM bear fire.
As you might have guesed I have no intention to trade precious metals in the near future. Buying into a breakout into new highs would probably suicidal and I usually don't like to short bull markets. So for the next couple of weeks I'll probably be more focused on shorting stocks as our bearish scenario seems to reveal.
I suggest you be extremely careful in the following weeks. Shorting is tough even in confirmed bear markets as counter trend rallies are always violent. The best protection is just to not overexpose. Good luck!
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