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Gold, Silver Relationship Key to Profits

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And what happens in both depends on other markets, as well.

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The bottom in silver was accompanied by a buy signal from the Stochastic Indicator, which was also the case at the end of January 2009. Back then, a relatively large rally followed, so this may also be the case here. Naturally, it may be necessary to wait for an additional few days of prices closing above the 14.5 level in order to confirm the move, but given the size of the volume on Friday, I think it's likely it will move higher from here.


Click to enlarge


The analysis of the medium-term chart emphasizes the size of the volume of Friday's session. Combining this bullish signal with the cycle analysis that I've featured suggests that higher prices are to be expected from here, with a local top several weeks away.

General Stock Market

For a considerable amount of time, the main stock indices have been rising on a declining volume. Such a divergence usually suggests that the rise is only temporary and that the true price direction is down. Since this could be the case here, I'd like to point your attention to the fact that the level of volume is not yet screaming "sell."


Click to enlarge


Since it's the long-term tendency that's the subject of this analysis, I've used the weekly chart that filters out the daily noise. The weekly SPY ETF chart makes it easy to compare the volume that accompanied previous tops to the volume in the previous weeks.

Please note that past tops were mostly accompanied by volume that was visibly lower than what we've seen in the past several weeks, so we may indeed move even higher -- the next Fibonacci resistance level is just below 110, which is also close to the upper border of the price gap of 108.02, which formed in early October 2008 -- before correcting.

Summary


This week, the precious-metals sector moved higher; silver rallied on strong volume, which may mark a beginning of a new substantial up-leg. Gold is currently in a cloudy technical situation, and much depends on what happens in other markets.

The value of the main stock indices is naturally an important factor as well, especially for PM stocks and for silver because of silver's many industrial uses. For now, the general stock market is overbought and it moves higher on a declining volume. But the size of the volume isn't yet very low, so it wouldn't surprise me to see even more strength in the Dow Jones Industrial Average and S&P 500 before they make a move lower. It's too early to say whether such a move would drag PMs down along with them. Additional signals come from my firm's indicators and from the analysis of other markets.
Positions in gold and silver.
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