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September 23, 2010

Time for a Pause?

Although my recent scribbles on the public blog have focused on the potential for stocks to roll over into an extended decline, the main focus of my trading continues to be precious metals. Indeed, the run out of the July low has been fantastic for precious metals and their related equities, which were unphased by the August dip in the general stock market. However, several charts I have been watching suggest that the precious metals complex is due for at least a brief pause. Furthermore, these views suggest that once the pause completes its work, the next stage of the precious metals rally could make the July to September run look monotonous.

Let's begin with the most powerful of the charts. A key entry in my chartbook is the view of silver priced in Canadian dollars. After all, the vast majority of publicly-traded silver mining companies are based in Canada, so it is obviously helpful to view price in the currency they care about most.

Silver price in Canadian dollar

A striking feature of this chart is the scope of the basing pattern silver is completing with its test of the bull market high at CAD$22. The pattern spans 2 1/2 years and is CAD$11 deep, suggesting a powerful, 50% move higher once the pattern resolves. Now, major breakouts rarely occur without at least one rejected attempt, so a back-test of the previous break-out level is more likely than not. Furthermore, silver is notorious for committing technical violations just before initiating an impulsive move, so don't be surprised to see that first breakout temporarily "fail" just before price accelerates higher.

Gold mining stocks are in a similar situation:

XAU Index chart

Finally, palladium, which has been a leader in previous parabolic moves, appears ready to resolve its own constructive pattern:

Palladium price chart

A word of caution: these views suggesting a pause in precious metals action are by no means sell signals. The idea here is simply to be prepared for a temporary change in tone for gold, silver and mining shares. My cycle work combined with a turbulent macroeconomic backdrop suggests we will see an explosive move higher in coming months, and attempting to sidestep small corrections is not worth the risk of missing a chunk of that move.


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