Gold and silver in the eye of the storm

June gold futures - daily chart
June gold futures – daily chart

” Does the Flap of a Butterfly’s Wings in Brazil Set Off a Tornado in Texas” comes from Chaos Theory to describe how tiny variations can affect large and complex systems, such as weather patterns. But this could apply equally to the financial markets, as in the last few days gold appears to have suffered to  its own ‘butterfly effect’.

The first signal that all was not well with gold was the ‘death cross’ which appeared on the daily chart back in March where the 50 ma crossed below the 200 ma (as shown by the blue line crossing the yellow). This was the first ‘flutter’. This was then followed by an extended period of congestion with the precious metal trading between $1550 to the downside and  $1600 to the upside, and resulting in an  extremely well defined region, marked with pivot lows and pivots highs.

The next significant break was a move through the floor of support at $1550 and a test of the green dotted line at $1500 per ounce.  This was a potential area of support which has now been breached in dramatic style with yesterday’s wide spread down candle taking the metal to test the $1340 price point.

The move lower has been accompanied by extreme volume over the last two trading sessions, reflecting that this is not a false move, but a serious one in which all the big operators are participating.

In overnight trading there has been a modest recovery for gold with the June futures contract trading marginally higher at $1375.60. However, with the weight of price congestion overhead any sustained recovery will require huge and dramatic inflows of buying which will be signalled on the volume chart.

Moving to an alternative representation of volume as shown by the volume at price histogram on the left of the chart, here we can see the depth of congestion now awaiting any recovery for the metal in the $1550 to $1600 region. And for any sustained recovery the bar at the bottom of the histogram will now need to develop well beyond of that above to build the required platform of price support.

June gold futures - weekly chart
June gold futures – weekly chart

The weekly chart for gold shows a similar picture but of course gives us a longer term perspective, always critical when markets are in these volatile phases. The same approach was required when gold was soaring towards $2000 per ounce, and it is very easy to believe that the move will last forever. It won’t, and the same will apply here. No doubt gold bears and analysts will be forecasting the demise of gold back to $1000 per ounce and below. Not here. As always we will be guided by volume and price action on the chart.

So what is the weekly chart signaling? Well as you would expect the volumes once again are extreme and rising for the June contract, with all the major operators selling heavily into the move lower. However, as on the daily chart, this morning’s bounce higher can be seen in the wick to the underside of the candle as the metal attempts to recover the $1400 per ounce region. The key here of course is once again the 200 period moving average, the yellow line, which has now been breached, but the most significant aspect of this chart is once again volume at price on the left hand side, and for two reasons.

First, is the extent and depth of resistance now above which extends all the way from $1400 up to $1600 per ounce, and this will require a massive and sustained period of accumulation by the large operators before we see any long term move higher. Second, and just as important, is the obvious lack of any equally strong platform below. This is a worrying sign, and should the market break below the $1300 per ounce region then the next technical level becomes the $1250 per ounce region.

However, first things first. Volume will lead the way, and any reversal from this level may take several days or weeks, for the platform to build followed by the breakout. If this does indeed develop into a buying climax by the big operators, then expect to see some low volume tests prior to any subsequent breakout from consolidation, and of course, some deep hammer candles and narrow spread candles with wicks on the daily chart, as stopping volume signals an end to the move lower.

Finally, what of silver?

May silver futures - weekly chart
May silver futures – weekly chart

Well as you would expect the industrial metal suffered a similar fate yesterday as for gold, with silver selling off sharply, and with widening spreads coupled with rising volumes, the outlook remains firmly bearish on the weekly chart, but perhaps tinged with some optimism given the potential support region now waiting in the $16 to $20 per ounce area, and as shown on the volume at price histogram. At least for silver, there appears to be the prospect of a sustained support region relatively close, with $18 per ounce likely to offer the strongest prospect, should this be tested in the longer term. Above, as for gold, you can see the depth of resistance overhead which now extends from $26 per ounce right through to $36 per ounce, and as for gold, we will need to see sustained and heavy volumes in any buying climax by the big operators, and from there, a consequent breakout and move higher with low volume tests as we break away.

But for the time being, that is all some way off.

Markets do not reverse on a dime, and just like the oil tanker, they have momentum behind them, and to stop, takes time and effort. Any meaningful recovery will first be signaled with a congestion phase, stopping volume, and sideways price action as any final selling pressure is absorbed, before breaking out, as any reversal gets underway.

By Anna Coulling

About Anna 1054 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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