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January 22, 2010

Freak-Out Point

Precious metals inflicted more pain on unsuspecting traders (that is, traders who do not read The DOCument) as gold bulls got taken for another 1% and silver holders were knocked for 2%. No doubt, there will be more than a few bouts of restless sleep in the realm of precious metals bulls over the weekend. I have to admit that not even I expected silver... and especially Silver Wheaton... to be pummeled so harshly during a correction. I suppose one bright spot is that this decline has generated just the type of negative sentiment needed to see our charts morph into a parabolic run. But will they? There are positive and negative signs all around. Let's have a look.

Although our main concern is precious metals, I will begin with a look at the S&P 500 since I believe this current correction is primarily equity-driven in the sense that the stock market was long-overdue for a cycle low. We were looking for the SPX to test its 65DMA during this correction. Well, we got a little more than we asked for:

s&p 500 chart

I was anticipating a late rally Friday in order for the SPX to hold the 65DMA. No such luck. We now need a quick recovery of the MA to betray underlying strength for the next move higher. Perhaps we'll see a narrow-range day Monday followed by a swing low on Turnaround Tuesday. On the other hand, if price lingers or crawls beneath the MA, we could be facing a much larger correction.

It is interesting that prices were so weak in the face of a down day for the buck.

us dollar index chart

Maybe traders don't believe the buck can turn lower here or perhaps markets simply needed to complete the sentiment cleansing process. Granted the move lower in the DX was mild, but as the chart shows, we got a swing high after a bounce off the 200DMA. Just what the DOCtor ordered months ago. Let's see if it sticks.

As noted above, I have been surprised by the harshness of the correction in precious metals. Although I acknowledged the possibility of rolling into a correction when I was chasing prices last week, I certainly did not expect gold and silver to test the December low. If our spring run is going to materialize, it's going to have to start soon. A bit of encouraging news came from mining shares, which showed good relative strength Friday. GDX even closed positive, and this leadership is an important precursor to a turn higher in the metals themselves.

GDX weekly stock chart

So rest easy, my fellow precious metals buffs. The action feels precarious, but the market has not yet betrayed us. Find something distracting to do this weekend, and clear your minds. We should know in the coming week whether our near-term bullish views are justified, and we'll want to be sharp in our next decisions.


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