Commodities, including gold and silver, have plunged to become so deeply oversold that a snapback rally looks likely soon, that could be sharp as if they turn up here it will trigger a wave of short covering. Such a rally is likely to be sparked by a dollar reaction, as we will see, but it is likely to be followed by further heavy losses across the sector if a general market crash ensues as expected.
We will start by looking at the latest dollar index chart, as a dollar reaction here will be what ignites a commodity rally. The 2-year chart for the dollar index shows that the dollar is rounding over beneath a zone of resistance that dates back to a reversal that occurred at this level last October and November. The pattern that has formed from last July looks like a large Head-and-Shoulders bottom with the Right Shoulder of the pattern about to form. If this is what it is, it implies that the dollar will in due course go considerably higher to the 102 – 104 area, which we can expect to happen during the market crash phase, but first there is the little matter of the Right Shoulder forming to balance the pattern, and if a more or less symmetrical Right Shoulder forms then we are looking at the dollar dropping to the 91 – 92 zone over the near-term, which will be sufficient to generate a significant snapback rally in commodities, that, as mentioned above, is likely to be magnified by short covering.
That is the theory that I have and which is mine and what it is too.
So now let’s proceed to review the charts of a range of important commodities – copper, gold, silver, and platinum and their respective COT charts, which will give us more of an idea regarding how likely it is that they will soon rally. 1-year charts are selected to enable us to relate them directly to the COT charts which are also for 1-year.
Starting with gold we see that it has accelerated into a deeply oversold state on its MACD indicator and relative to its moving averages, with the drop from its April peak clipping $150 off its price at its April peak. Clearly gold didn’t take kindly to the dollar’s latest rally. Gold’s accumulation line has held up well, however, which increases the chances of a snapback rally imminently, which will be augmented by sudden short covering as mentioned above.
Not surprisingly, Gold’s COTs have improved substantially as this drop has unfolded, and this past week arrived at a level that is construed as bullish, as the manic – depressive and wrong Large Specs gave up on gold in increasingly numbers. These are the best readings we have seen for a year, and while they don’t guarantee an immediate rally, they make one highly likely.
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Silver has also dropped, albeit rather grudgingly, because it is already so depressed, and it is noteworthy that it is approaching but has not dropped below its lows of last July, as we can see on its latest 14-month chart, with this timeframe being selected to show this low. Whilst not as oversold as gold, it too looks set to bounce back with it, although it will encounter significant resistance above $16. As with gold, silver’s accumulation line has held up well and supports a rally soon.
Silver’s latest COT chart shows that the Large Specs suddenly got enthused with it some weeks back before they were shot off the parapets and finally crawled back into their hole in a capitulative manner last week when their long positions plunged to a low level. While Commercial short positions could drop a bit more (Small Specs are still quite bullish), they have certainly dropped enough to permit a rally to develop.
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Moving on we see that poor old Dr Copper has “taken it on the chin” in recent weeks, after a failed attempt to break out into a 3rd upwave was followed by a violent reversal and breakdown from its long-term uptrend. This alone has bearish implications for the entire world economy. However, it is now deeply oversold, at support, and thus in position to stage a relief rally. We are looking at a 2-year chart for copper in order to see the origin of its long-term uptrend and also the significant support that exists at and just below current levels that arises from the considerable trading in this area in the trading range that formed from November 2016 through July 2017.
Copper’s COTs now look decidedly bullish for the near-term, with the Large Specs, having taken a severe beating, giving up and heading for the hills, which of course greatly increases the chances that it will now rally.
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You may recall that we had thought that platinum had hit bottom some weeks back, largely on account of the collapse in Large Spec long positions, but it has since dropped even further in sympathy with the sector, and we now have a situation where the Large Specs are short to a significant degree, which is considered to be very foolish given how undervalued platinum is relative to gold, and given the South African government’s plans to take over the mining industry and kick out the whites running it, which, needless to say, will lead to a shambles and probably a supply shortage. Of all the metals, platinum looks like the best value here. The spike down to a low early in July looks like a capitulative move, and the low of a few days back looks like a Double Bottom with that low that will probably lead to a significant snapback rally – at least until the markets crash.
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End of update.
Posted at 5.30 pm EDT on 22nd July 18.