Many are saying we are at the start of a sell of in gold, silver, and oil. I’m looking for indicators. I try to identify key price levels and then allow price action to generate signals about Mr. Market’s preferred direction. I am currently sitting in cash waiting for setups to emerge. Technical analysis is only one view of the marketplace and often times it proves to be contradictory to Mr. Market’s plans.
Currently I have differing views on the U.S. Dollar. The debt issues in the Euro zone were pushing prices of the U.S. Dollar Index higher while the Euro tested critical support.
At this time I do not have an open position in any of the underlying assets discussed in this article. No equity, futures, or option positions are open at this time. Right now the S&P 500 looks like it could go either direction, but the day/week is far from over.
S&P 500
The S&P 500 Index Options (CBOE: SPX) traded slightly lower Tuesday. It is trading right at a key support level. Solid volume accompanied lower prices yesterday as represented by the S&P 500 E-Mini futures contracts as well as the SPDR S&P 500 ETF (NYSE: SPY). I am going to be watching price action closely the next few days to see how the S&P 500 index handles the current support level. Right now the SPX looks poised to break down. The close on Tuesday and Wednesday should provide traders with clues about where the S&P 500 is headed. The daily chart of SPX shown below illustrates the key support levels in the short term:
U.S. Dollar Index
The U.S. Dollar Index pushed above recent highs on Monday but is experiencing selling pressure today. The selling pressure is being largely dismissed by the S&P 500 but other risk assets such as gold, silver, and oil are benefiting. Right now risk assets are trading primarily in the opposite direction of the Dollar. Obviously there are exceptions to the rule, but a strong Dollar has meant lower equity and oil prices specifically. Gold and silver have been holding up well as fearful investors are using the metals as safe havens against the potential for a European debt default or a Euro currency crisis.
The U.S. Dollar may have put in a key pivot low on the daily chart back in the early part of May. In addition, the key 200-period moving average is overhead and the U.S. Dollar may be poised to test the key price level in the future.
While the Dollar could roll over and probe lower, the fact that it has put in a higher low and broken out above recent highs is bullish. Similar to the S&P 500, the next few daily closes are going to be critical as it relates to risk assets.
Gold
Gold futures closed the day above the 20-period moving average on Monday and extended gains Tuesday. Gold did not sell off to the same degree as silver and so far the 50-period moving average on the daily chart has offered key support. I would not be surprised to see the rally in gold continue in coming days and weeks as the situation in Europe will likely be in the forefront of headlines in the near term.
It is possible for gold futures to push higher and possibly attack and test the recent highs. If we do get a strong extension higher in gold I would expect a blow-off top and a subsequent sell off that is quite deliberate and nasty. I think in the short term we could see gold put in new highs and possibly climb above the key $1,600 an ounce price level. However, if we do get a strong extension higher I will expect to see sellers beginning to step in if price gets above $1,600.
Light Sweet Crude Oil
Analysts from Goldman Sachs are declaring that oil prices will likely increase in the near to intermediate term. Price action on Tuesday just about totally negated the nasty red candle from Monday. Oil continues to consolidate near the lows and will eventually either breakdown to new lows and possibly test the 200-period moving average or we will see an extension higher to the $103 – $105 / barrel price level.
In the longer term, I remain extremely bullish of energy as the fundamentals indicate that oil demand will likely continue to rise while supply levels remain flat or begin to increase. Oil prices are likely to go much higher than what most analysts are expecting. If oil prices continue to consolidate at these levels a breakout is nearly inevitable. The question remains which way will oil break?
Silver Futures
Silver futures are rallying hard on the weak price action in the U.S. Dollar. Silver is currently trading +3.50% intraday and is on target to test the .236 Fibonacci Retracement level. Silver looks relatively strong here and if prices continue to work higher I would expect to see prices of silver reach as high as $41.25 before sellers take back control.
The underlying demand for silver is still there. If the Dollar continues to weaken or more money pours into silver as a safety hedge away from the Euro currency, we could see silver put on a strong run higher before ultimately selling off again. Silver futures trade with increased volatility during specific periods of time.
Conclusion
I continue to watch price action waiting for a solid setup to form before getting involved. I realize that precious metals and oil were higher Tuesday but both are the products of a weaker U.S. Dollar. What I do know is taking an anticipatory trade on the S&P 500 is a great way to lose money. I hate losing money, so I will remain in cash in the short run and let price action dictate my next trade.
In my opinion we are sitting at a key inflection point that is going to tell us a great deal about the tenor of the marketplace. When we get a failed break or a key breakout it should provide traders with clues about Mr. Market’s intentions. Until then we will have to sit back and wait patiently for prudent setups to transpire.
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