THE CHARTS WEIGH IN ON GOLD, SILVER / BARRON´S MAGAZINE ( VERY HIGHLY RECOMMENDED READING )

Getting Technical

 

MONDAY, MAY 16, 2011

 

The Charts Weigh in on Gold, Silver

 

By MICHAEL KAHN

 

For both metals, the long-term prospects are still solid. But silver could fall further in the near term. 

Silver's recent drubbing may have popped a short-term commodities bubble but the long-term trends in many areas - including precious metals - remain intact. Once silver and, to a lesser extent, gold work off current volatile conditions, the bulls can resume control.

Right now, conditions in many commodities from metals to oil to livestock are marked by steep moves lower. And volatility levels are well above what we might consider to be normal.

John Bollinger, chief of Bollinger Capital Management and creator of volatility-based trading bands that bear his name, has said that volatility moves from low to high and back again.

In other words, as with other technical indicators, volatility is not unlike a pendulum that swings from one extreme to another. And according to the math, a trading range is a good way to allow volatility to contract, suggesting that precious metals markets should find some stability right in the current general area.

That does not preclude them from breaking down later. But for now, assuming no further shocks from outside the market, the easy money in both selling silver and gold has likely been made.

The long-term chart of the SPDR Gold Trust (ticker: GLD) shows that the bull market is still very much intact (see Chart 1). A pair of parallel trendlines, together called a "trend channel," defines the move from the low set in November 2008.

Chart 1

SPDR GOLD TRUST

Using this framework, the April high came very close to the top of the trend channel where we would expect selling pressure to increase.

Should the gold ETF continue to fall, major support in the 136-140 area (it traded at 146 Monday) would be the more critical area for the bulls. This is where the trend channel and support from various low points seen over the past seven months meet and where demand would likely pick up if the bull market is indeed healthy.

Silver, of course, was the volatility leader as that indicator spiked to levels not seen since the last time commodities busted in 2008. But here, too, the long-term trend of the iShares Silver Trust (SLV) remains intact (see Chart 2).

Chart 2

SPDR GOLD TRUST

Given the movements in both directions this year, silver is not a market for the faint of heart. The pace of the gains accelerated giving the rally a parabolic shape on the charts and the faster the pace became the more dangerous it got for bulls and bears alike.

Missing the timing by an hour, let alone a day, would have been disastrous.

My rule of thumb is that markets that have a parabolic increase tend to have a mirror image on the way down. For the silver ETF, we can see the start of the parabolic increase in January from a price of roughly 27 with a pause between 34 and 36. On the way down, it bounced at roughly 34, where it traded once again Monday, so the mirror image is in play.

That suggests important support is below at 27 for a full give-back of the year's frenzied gains. Indeed, the rising trendline from the 2008 low will rise up into that area within several weeks making it a critical juncture.

I am not making a prediction that prices will fall that low although even a move of that size would not break the back of the long-term bull. Rather, the point is that volatility must work itself off before investors can think about getting back in.

There is no doubt the short-term conditions of precious metals were significantly damaged. But for patient investors, these markets are still in good long-term shape.

Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved