Gold looks awful, having broken down from a Head-and-Shoulders top on Friday. It should now drop down into the support zone in the $570 - $580 area shown on the chart. However, with the dollar now short-term overbought following its sparkling performance last week, and prone to react/consolidate, we should not be surprised to see gold rally back to the underside of the H&S top, i.e. to the $612 - $615 area, probably early in the coming week, which would be viewed as an opportunity to short it, with a close stop above the neckline.
The situation for Silver is very similar to that of gold. It broke down from a particularly fine example of a Head-and-Shoulders top that projects the price back down to support in the $10.50 - $11.00 zone. A relief rally now back up towards the neckline of the H&S top at $12.40 would be viewed as providing an excellent opportunity to short it with a close stop above the neckline.
Not surprisingly, Precious Metals stocks, as measured by the HUI index, broke down from a Head-and-Shoulders top in tune with the Gold and Silver breakdowns from their H&S tops. Although the short-term oversold condition may generate a bounce early next week, the outlook is grim, with the index expected to continue to drop steeply back into the strong support in the 270 - 280 area. Thus, any near-terms rallies will be viewed as providing an opportunity to short the sector across the board.
Oil broke down from its 5-year uptrend last week, although, as we can see on the chart, it has yet to break down below an important support level at and extending below the late 2005 low, once it does, which will be signified by Light Crude breaking below $54, it will be a bear market. Whilst this support holds there is still an outside chance that oil will rally to the $70 area to complete a Head-and-Shoulders top area, although developments across the commodities sector last week are making that increasingly unlikely. It is considered hazardous to short oil while it remains above $54.
Now we come to one of the underlying causes of the unraveling of the commodities sector - the US dollar. The following is lifted from an article that was posted on a number of public websites a few days back on the 4th - "A major precipitating factor behind the carnage in commodities yesterday was the action in the US dollar, which rose strongly. The last thing you want to be part of in this business is a very large crowd, and dollar bears are a VERY large crowd. Over the past few months dollar bulls have been almost as hard to find as mahogany trees, while you could probably fill a thousand baseball stadiums with dollar bears, at a conservative estimate. This is a situation that creates the potential for an explosive advance, and it is the dawning perception of this possibility that is believed to be a contributing factor behind the extraordinary action yesterday. A glance at the long-term dollar chart quickly reveals that there is plenty of scope for a substantial advance, even if the fundamentals appear to rule it out, especially as it has recently been flirting with multi-year lows." Now we will subject the dollar chart to deeper technical scrutiny.
On the 6-month dollar chart we can see recent action in detail, and the strong 3-day gain last week that caught so many out. After a rise of this magnitude it is entitled to take a breather, as it is now short-term overbought, and has entered a zone of significant resistance with its moving averages still in bearish alignment. Therefore we should not be surprised to see reaction/consolidation in coming days leading to a relief rally in commodities that will provide better entry points for establishing short positions.
On http://www.clivemaund.com we do not cheerlead gold, silver, oil or anything else - if it looks like it's going down, it gets sold, and if it looks like it's going down a lot, it gets shorted.
On the site at this time we have drawn up a list of suitable stocks to either sell short or to buy Puts in, for portfolio protection or for speculative gains. To end on a positive note for gold and silver, if the scenario described here comes to pass, the long-term bullmarket in gold and silver will resume with a vengeance once the dollar C wave up is complete.
http://www.321gold.com/editorials/maund/maund010807.html