MARKETWATCH - probable dollar and PM sector scenario...
originally published January 19th, 2010Nothing has been posted on the site for several days, as apart from answering Emails I have taken a needed break, which helps to regain an overall perspective - when you stay close to the action for too long you end up not being able to "see the wood for the trees". Speaking of trees I have been hiking in the Villarrica National Park in southern Chile, where there is a huge smouldering volcano, see photo below, taken by me yesterday.
Villarrica Volcano, Villarrica National Park, southern Chile, 18th January 10.
Even though you may not be consciously thinking about work, the mind orders things subconsciously when you are out walking in the fresh air and therefore it is highly beneficial and productive - you are all thus hereby instructed to take a break and do likewise if at all possible when you are feeling tired or stale. Upon arriving back at my desk and examining the charts it suddenly hit me what is probably going on with respect to the dollar and the Precious Metals sector and the scenario set out below reconciles the action and in the dollar, gold, silver and the HUI index. This scenario explains the faltering upward progress of gold, the rollover in silver (which is likely to result in stocks like CDE and HL crashing support shortly), the prospect of a new upleg in the dollar and the likelihood of uptrend failure in the PM stock indices leading to a sharp reaction.
The notes appended to the charts below are intended to provide adequate explanation, and the customary descriptions are being kept very short in order that this can be posted on the site as soon as possible.
Gold: now appears to be about to enter the C downwave of an A-B-C correction to the preceding 5-wave upleg. This will actually be a healthy reaction back to the strong support at the top of the giant 20-month consolidation pattern and to the vicinity of the rising 200-day moving average, that will set the stage for another big upleg.
Silver: looking short-term toppy and set to react back to support near its rising 200-day moving average and at the bottom of its major uptrend channel.
Dollar: believed to have staged a major breakout last month, therefore the reaction back from resistance beneath its falling 200-day moving average in recent weeks has unwound its short-term overbought condition and created the conditions for another impulse wave that will take it well above its 200-day moving average this time. This obviously fits with a reacting PM sector.
HUI Index: latest upleg has faltered and is now believed to be a weak countertrend B-wave rally that is failing and will be followed very soon by breakdown from the year long uptrend as a C-wave reaction takes the index down to a target area well below its 200-day moving average. Note that this downwave would obviously be magnified in the event that the broad stockmarket caves in at the same time.
Action to take: will depend on whether you are a trader or long-term investor. Traders may want to lighten up on gold and silver with the aim of building back the positions once the C-wave (gold) reaction has run its course. With regard to stocks, the strongest stocks may continue to be held, otherwise traders can either scale back positions immediately or wait for the confirmation of failure of the HUI index uptrend channel by a 3% margin, as marginal breaks are sometimes followed by immediate recovery, employing a general stop loss in the 417 area. In the case of some stocks such as CDE and HL, mentioned in this morning`s Email alert, support lines are obvious, and specific stops can be placed beneath them.