Thursday, November 12, 2009

Significant Bearish Action in Precious Metals Today - Could be Stock Market Indicator

After my last post I went meandering through dollar charts and stumbled about gold and silver charts which I loosely follow. After looking at them for a few minutes a siren went off. The action in the metals is extremely bearish right now. On the daily charts it shows reversal patterns in both gold and silver, with silver being the most glaring. Silver rallied today higher than yesterday's high, then closed beneath yesterday's low. This is a very significant and reliable bearish reversal pattern. This is very problematic for gold bulls because gold has made a signficant daily high that silver hasn't followed. If silver is in fact reversing, then it will leave in place a big bearish divergence between the metals which usually happens at major tops. Also notice on the gold chart that the RSI has gone into overbought territory and then under it 5 times in the timeframe shown, and 4 of those times led to signficiant gold tops and declines.

This is very significant to our overall outlook of the stock market and the dollar. Although not confirmed, the EUR/USD appears that it may have formed a major top and has reversed back to its downtrend (this means the US dollar has bottomed). Seeing as that the EUR/USD has a high positive correlation to gold, then if gold and silver have topped, it means that the EUR/USD has probably topped. If the EUR/USD has topped, then the stock market might have topped. Are you seeing the connection here, and what this gold and silver data may mean? Remember that the US dollar's continued descent seems key to the stock market's rally. If the dollar has formed a major bottom, then the stock market should form a major top.

I'm by no means calling "the top" in now, it's still too soon. But it's quite possible this top may just sneak up on us, catching us off guard and beaten up after taking out our stop at the 1101 level. Like I said, the market will make it extremely difficult to catch this huge wave 3 or C, so we can't get complacent. Nothing is confirmed as of yet by any means, but these are things to look for and to see if they develop into something significant in the future here as we do look for a stock market top. So I'm still short term neutral on the stock market, waiting for confirmation.

No comments: