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| Wednesday, February 18, 2015 Short-Term Outlook for the Dollar, Gold and Silver by Dan Hassey, Editor, Gold and Energy Investor |
Dear Randy,
The headlines at the start of the year were troubling. The world endured a slowing global economy, unresolved problems with Greece, ongoing issues between Russia and Ukraine, and increased terrorist antics from the Islamic State. Now, though, we are seeing some positive global headlines.
Yet, quite often as the world goes, so goes the market. In this case, it means the crosscurrents of bullish and bearish news are causing the U.S. dollar, gold, precious metals, and most other stocks and markets to pause in their trends. As U.S. markets continue climbing, and while gold and oil try to get unstuck from their recent ruts, you will hear a lot of commentary on where they will go next. But if you want an objective, highly accurate source for that kind of intel, there’s only one place to go … To the charts! Today we’ll cover where the greenback, gold and its counterpart silver are going. We’ll also look at how they are getting there, and what you need to know now.
Most assets spend time consolidating after a move. These consolidations have many names and patterns such as pauses, sideways moves, rectangles, triangles, wedges, diamonds, topping andbasing. These chart formations can tell us whether we should buy, hold, sell or simply be patient until an opportunity becomes more attractive. What the U.S. Dollar Chart is Telling Us Here is a chart of the consolidating dollar:
Notice on the chart that the dollar has had several pauses during its rally that started in summer 2014. Pauses can create all sorts of patterns, as mentioned above. Most patterns in the dollar are rectangleswith defined support and resistance levels. Most consolidations last about one month to three months, before the prior trend resumes. A pause that lasts less than a month is normally called a pennant or a flag. However, consolidations can last much longer than three months as an asset tops or bases. Some tops can last more than a year. Even a few bases can last more than a decade. As for the dollar, it is currently consolidating and creating a rectangle pattern. A rectangle pattern happens when a security’s price trades within a limited range that makes underlying support and overhead resistance levels parallel to one another. On the dollar chart, we’re seeing a rectangle. Gold, on the other hand, has been trading in a range for many months now. So, it takes on a different shape as we wait for its next move … What Gold’s Chart is Telling Us After about a 10-year rally in gold prices, prices consolidated — or held steady near that higher level — for about two years. During the last year of this consolidation, prices formed a bearish descending triangle. This happened as participants sold their gold positions on rallies.
When prices broke down through support, prices fell to the $1,200 area and rallied. What’s more, its current pattern — with its lower lows and lower highs — could be considered a fallingwedge formation. Normally, when prices find the bottom in a falling wedge formation, prices will move sideways in a basing pattern (a consolidation pattern after a major downtrend). We should be able to trade this basing pattern. Overhead resistance will probably be from $1,300 to $1,350, and support will probably be below at the $1,150 area. At these lower trading ranges, prices are forming a base from which they can spring higher. Keep in mind: Bases are like diving boards. The longer the base, the better the next move. Here’s What Gold’s Move May Mean for Silver I like to use Erlanger Chart Room because it has many indicators that can help us spot entry and exit points. Below is a chart of the iShares Silver Trust (SLV), which generally tracks the price of silver. SLV ended yesterday’s trading session at $15.83, with March silver futures ending the day at $16.38 on the Chicago Mercantile Exchange.
Let’s look closely at SLV … From late 2013 to September 2014, the SLV established a bearish descending triangle as buyers sold on rallies. Prices tested support at the $18 level many times, but finally breached support the fifth time last September. Silver prices found a new bottom last November and may have started a basing period, with participants buying each pullback. Is Silver Becoming a Buy? There are four indicators I am watching very closely. The ideal buy signals would be:
Indicator No. 1: Stochastics (bottom pane on the chart) indicate oversold and overbought conditions. Here, I’m looking for stochastics to be below 30 and trending up. Stochastics (at 25.34 on this chart) are providing a buy signal. Indicator No. 2: The Displaced Moving Average Channelprovides buy signals when prices move above the moving averages and sell signals when prices move below the moving averages. With SLV trading below the channel (the green and red moving averages in the chart that surround the price action) … The DMA channel is not providing a buy signal. Indicator No. 3: Price pullbacks to the black trendline at about $15.25. This is not giving us a buy signal. Indicator No. 4: A favorable risk-vs.-potential-reward relationship. The current potential risk-vs.-potential reward relationship is just slightly better than 1-to-1. Not very exciting. We need more upside potential to consider making this trade. A pullback to the low-$15 area would give us close to a 3-to-1 risk-reward relationship. It gives us downside risk to $15 (less than $1) and an upside to $18 (almost $3). SLV slid almost 4.3% in Tuesday’s trading. If it pulls back some more, the risk-vs.-reward picture could improve. But this alone wouldn’t change our outlook to stay out of it for now. You rarely get all four buy signals, but we need more than one. So, while silver is starting to shine, it needs to gain some more luster before we can call it a “buy.” Good Gold and Energy Investing, |
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