Gold Wins, and Gold Loses

The most dramatic moves in the market last week belonged to the precious metals and their associates, which jumped like a shocked rodeo steer as the dollar lost ground.

The question now facing gold (and dollar) addicts is whether those moves were for real. Has the dollar’s relentless drive skyward now stalled? And will that trigger a sustained bull move for the precious metals, finally, after a four-year run through the investment world’s alley of septic horror?

KEEP-PANNING

Nothing’s certain, but our take is like this…

In the first place, there’s nothing that says the dollar and gold have to maintain a perfect inverse relationship at all times and through all markets. They won’t. There will be factors that either add to or detract from the general relationship, and that has to be kept in mind as we advance the discussion.

The Dollar Remains Potent

Second, both the fundamentals and technicals for the dollar remain bullish, despite the nearly month long decline we’ve just been through. The rest of the world’s major currencies are in the midst of substantial QE initiatives, all of which conspire toward dollar strength, and precious metals weakness.

Three, the charts show a potential bottom now in place for the Dollar Index (DXY) at the all important 137 day moving average (in deep red, below). Have a look –

DXY-DOLLAR-CHART

The obvious bad news for dollar bulls is the twice oversold RSI reads (at bottom, in red) from January and March of this year, which capped the dollar’s move and sent DXY into the drink just under a month ago. RSI went sub-waterline mid-April and MACD confirmed by taking on water two weeks thereafter (blue squares).

The good news is that the 137 day moving average, as mentioned above, generally provides solid support for any security, and that’s where we’re at now. It’s likely we’ll get a bounce here, even a shallow one, and that might be enough to slow the incredible rise we’ve seen from the precious metals of late.

Wait – one more dollar item!

Finally, a simple Fibonacci retracement calculation for the intermediate dollar move that began exactly a year ago (not seen on the chart) brings DXY down to 92, a roughly one percent decline before a bottom is firmly set.

With that behind us, let’s now turn to the precious metals.

And there we find the chart of the iShares Silver Trust (NYSE:SLV) most instructive.

Have a look –

SLV-MASSIVE-MOVE

The chart is in bull mode, to be sure, but that doesn’t mean it’s immune to a pullback or sideways drift over the near term.

Here are the salient technicals for silver –

  1. Most significant for us is the wild pop that occurred in less than three trading sessions last week (in red).

  2. It came on weak overall volume, and so may not be trustworthy, but

  3. RSI and MACD are indicating the move has legs. With both indicators now trending above their respective waterlines for three days now (blue boxes), and RSI still a ways to rise before striking its overbought 80 line (red dot), the action could well continue through this week.

  4. At the same time, one should be wary of the near ten percent move on the stock over such a brief time span. While it could constitute a final bullish breakout after four years in the doldrums, it could also be a ‘sucker’s rally’, typical in downtrending markets when shorts move en masse to cover their bets and the market shoots higher – only to retreat once again when the climb stalls and the shorts reset their trades.

Which Way Home?

While we believe the cap for silver may not be in, it certainly won’t be found much higher than current levels. The downtrending 274 day moving average (in orange) provides ample resistance to the move, offering another two and a half or three percent gain from here, maximum.

In short, it appears like the dollar and the PM’s are about to reverse direction.

That being the case, we have two trades that require immediate action.

The first was opened just two weeks ago in a letter called Nothing in the Hole: Gold Miners Surface Empty-handed. There, we wrote that SLV had been battered too low while the miners were rising without cause. We bought SLV and sold short the Market Vectors Gold Miner ETF (GDX) for a credit of $580.

Last week, we reported that the spread had moved in our favor, with SLV and GDX sitting just $420 apart.

And this week it’s looking even better.

SLV-GDX-CHART

And because we’re expecting a top-out for silver any day now, we also feel it’s best to close.

Wall Street Elite recommends you consider selling your SLV shares for $16.75 and buying back your GDXs for $20.72, for a total profit of $183 per 100 shares matched (580 – 397).

Hope you went in big.

Gold (GLD) Trade II

Our next trade did not pan out so famously, and therefore requires some reparations.

You’ll recall that back on March 9th we wrote a letter called Gold Tech Wreck in the Making, in which we urged you to sell the GLD May 117 CALL for $1.34 and buy the GLD May 106 PUT for $1.25, for a total credit of $0.09 per pair.

The options expired last Friday, with the former in-the-money and the latter expiring worthless.

And that means we’re underwater.

GLD sits presently at $17.53 after its own heady rise (see below), putting us $0.44 in the hole (53 – 9) and in need of a fix.

Let’s have a look at the chart to determine the best solution for our existing (still paper) loss.

GLD-CHART

GLD’s jump of the last few days was not as pronounced as SLV’s and her chart is slightly less bullish as result.

That’s why we’re recommending the following –

[mepr-rule id=”994″ ifallowed=”hide”][mepr-unauthorized-message][/mepr-rule]

[mepr-rule id=”203″ ifallowed=”show” description=”wall_street_elite_members_only”]

Sell the GLD shares you’re now sitting on and, in addition, sell an out-of-the-money CALL to recoup the loss.

Wall Street Elite recommends you 1) close out your long/short SLV – GDX position, as indicated above, and 2) sell one GLD June 121 CALL for every short CALL you originally traded. They now trade for $0.80 each.

[/mepr-rule]
[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

Sell the GLD shares you’re now sitting on and, in addition, sell an out-of-the-money CALL to recoup the loss.

Wall Street Elite recommends you 1) close out your long/short SLV – GDX position, as indicated above, and 2) sell one GLD June 121 CALL for every short CALL you originally traded. They now trade for $0.80 each.

[/mepr-rule]

With kind regards,

Hugh L. O’Haynew

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.