After the rather dramatic reversal in gold and silver on Monday, it is clearly in order that we review their charts as soon as possible to consider what this action portends.
There was a story going about that a group of speculators last week took out heavy short positions in silver after the cut off date for the COTs on Tuesday, as it takes 3 days for them to get around to reporting the COT data, which delay is in the writer’s opinion intentional to provide a window for just this kind of operation.
However that may be, we had already flagged the $2100 level on gold as being critical some time ago – gold has to break clear above this level to kick off the next major bullmarket phase. It broke clear above this critical level in the Asian trade Sunday night whereupon it looks like powerful forces stepped in, in light trading conditions, to knock it back down below this level and their success in doing this caused it to drop back further during the day on Monday. Rather surprisingly PM stocks were not heavily impacted by all this as we can see on the GDX chart below, which is viewed as positive.
Even though the forces that don’t want gold going up were successful on Monday, all they succeeded in doing was postponing the inevitable and a big reason that they got away with it is that gold and silver were already overbought going into the weekend. Next time gold tries to break above this critical level it is likely to do so from a position of more strength.
So, what now? After a reversal day like we saw on Monday it is normal for some sort of correction to ensue and what is thought likely to happen is that gold and silver react back further in a zigzag pattern towards their positively aligned moving averages to the oval target areas drawn on their respective charts before they stabilize and turn higher again. However, the key point to keep in mind is that once gold succeeds in breaking above the key $2100 level it’s on and we just had a clear demonstration of how important this level is on Monday when the “big guns” were brought in to stop it holding a breakout above this level – and they won’t be so successful in future.
As for stocks, the GDX chart still looks strong with a genuine breakout from a Head-and-Shoulders bottom having occurred about a week ago that was on strong volume, driving its Accumulation line steeply higher. So it doesn’t look like they will react back much – GDX showed resilience and didn’t drop back by much on Monday considering the drop in the metals – so it is expected to drop back to the support shown and if it does drop back further into the base pattern it shouldn’t be by much before it stabilizes and turns higher again and any such drop will be viewed as presenting a great buying opportunity.