If you want to be an effective and profitable investor, you should look at a situation from different perspectives and make sure that any action you are about to take is really justified.
In the precious metals market, very often it turns out that if you take a look at gold’s price chart only, the outlook is incomplete or even unclear. For this reason, my firm usually complements the yellow metal’s analysis with the analysis of silver, mining stocks, the general stock market, important ratios, and other related markets.
As you probably know, precious metals usually move together on a short-term basis, even though they may evolve into different formations in the medium and long term. That’s why we decided to feature the palladium chart today. Does it provide us with interesting clues as to the next possible moves in the entire sector? Let’s take a closer look at the below chart and find out (charts courtesy of http://stockcharts.com
On the above chart we see that in recent weeks, palladium continued its rally and reached the declining resistance line based on the 2013 top and the May peak (in terms of weekly closing prices). This stopped buyers and we saw a decline, which took the price to the 70 level last week. Although we saw a pullback at the beginning of this week, buyers didn’t manage to push the prices higher the above-mentioned resistance line. This might result in further declines.
What’s next? In the short term we might see some strength and a small move to the upside, but there is another declining resistance line based on the 2013 top and the May peak (on an intraday basis), which may trigger a correction.
Please note that when we saw a similar price action at the end of March and in late May, gold, silver, and mining stocks didn’t move visibly higher. Therefore, even if palladium climbs up once again to the next declining resistance line, it will likely not trigger a significant increase in the rest of the precious metals sector.
But what could happen if the buyers fail? If palladium declines, it seems that it will move the rest of the sector lower.
The shape of this relationship is rather similar to the one between gold and crude oil. So, let’s move on to the “black gold” chart and check if this commodity is still quite useful in analyzing the precious metals market.
On the above chart we see that the situation has deteriorated slightly. In recent weeks the situation was overbought on a short-term basis (the RSI indicator was above 70) and a short-term correction was quite likely. In recent days, the RSI has dropped below 70 and generated a sell signal. This circumstance encouraged the oil bears to go short and triggered a corrective move. Although the price of crude oil still remains above the broken long-term declining resistance line, the recent correction took it below $105 per barrel.
At this point, we would like to draw your attention to the fact that in the past we saw the yellow metal’s price move higher along with the price of crude oil (there are periods when this relationship worked, but it was not always the case).
The current rally in gold took place along with a rally in crude oil. From this point of view, if oil corrects, this could trigger another move lower in gold as well.
Now that we know the current situation in some other commodities and the implications for the precious metals sector, let’s turn to our final chart: the gold chart, from the perspective of the Australian dolla. In my firm's opinion, this is a very interesting chart that may provide important clues as to gold’s further price movements.
Click to enlarge
On the above chart, we see that the price of gold in Australian dollars hasn’t changed much. Although gold climbed up above the declining resistance line, the breakout was invalidated very quickly, and the price came back below this declining resistance line (currently close to 14.5).
We saw similar price action in June. After the invalidation of the breakout above the above-mentioned declining support/resistance line, there was a pullback to this resistance line. The buyers, however, didn’t manage to push gold above it. This resulted in strong declines, which took the price all the way back down to the April bottom area.
As was written on July 24 in Has Gold Started to Respond to US Dollar Price Moves?
If we see similar price action here, gold priced in Australian dollars will likely decline once again. Such a triple-bottom, in this case, would likely mean a breakdown below the previous lows in the price of gold seen from our regular USD perspective, a price action similar to what was seen in June.
So, from this point of view, the recent moves up haven’t changed much and the current outlook and the implications remain bearish.
Summing up, both palladium and crude oil are in medium-term uptrends whereas gold, silver, and mining stocks remain in a downtrend. The implications of the palladium chart for the whole precious metals sector are rather bearish for the short term, as the chart indicates that the current move to the upside is over or might be over soon. The short term picture for crude oil is also bearish, which may translate into lower precious metals prices in the near future.
For the full version of this essay and more, visit Sunshine Profits' website.
No positions in stocks mentioned.
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