Technical Analysis | Gold and Silver

Gold and Silver Technical Analysis

In this gold and silver investment blog, Momentum Rider will be demonstrating a technical analysis pattern called an Inverse Head and Shoulders pattern. It is a bullish reversal pattern that occurs after a strong downtrend and it can produce a very powerful uptrend. Normally, the Inverse Head and Shoulders pattern is much smaller in time duration and in amplitude than the one we will be illustrating in gold and silver. But, as we explained in a previous blog on gold and silver, this pattern is part of a very large consolidation phase for the precious metals (see Gold and Silver To Shine Brightly in 2012). The gold and silver Inverse Head and Shoulders patterns will have significant upside energy because of their large size if they finally break out above their necklines. This will be explained in more depth later in the article.


First, it is worth spending some time telling you more information about what this pattern is. In addition, we will be using some specific examples that should prove useful for your understanding. The Inverse Head and Shoulders pattern is a chart pattern used in technical analysis that predicts the strong reversal of a downtrend. The Inverse H&S pattern is broken down into three smaller parts. Note that you may also see this pattern named an “Inverted Head and Shoulders” or a “Head and Shoulders Bottom”.

The first part of the pattern is where the price falls to a low or trough from a downtrend and then rises back up a percentage of the previous downtrend (left shoulder). The second part consists of a fall to a lower price than the first trough low and then another rise back up (head). The third part of the pattern is a fall from the uptrend from part 2 that does not go as low as the second trough or the head (right shoulder). The right shoulder low frequently doesn’t get as low as the left shoulder low. Finally, the rise from the third trough low takes it to a breakout line connecting the highs from the left shoulder and right shoulder (neckline). Typically the average volume in the shoulders is lower than average volume in the head phase. Two chart examples are shown below:

Example 1: Breakout Above the Neckline On Volume (Safer Entry With Pattern Confirmation)

There are two recommended ways to take advantage of the powerful Inverse Head and Shoulders pattern. The first is to identify the pattern early and to buy in the trough of the right shoulder. The second way is to wait for a high volume breakout of the neckline. Playing the breakout is generally a safer entry with full confirmation of the pattern. Buying in the right shoulder trough has more risk but it can be more profitable because of the lower price entry.

The chart below is an example of an Inverse Head and Shoulders pattern that Momentum Rider identified for subscribers in the middle of 2010. Obviously, it was very successful and profitable for us. It was part of a bottoming process for the S&P 500 similar to what gold and silver looks like right now. Note that this pattern is fairly deep and long in duration at about 4.5 months. That large depth and long duration helped to provide a very powerful move up that followed the breakout from the neckline.

Example 2: Breakout Above the Neckline a With Strong Run Up in 2010 for the S&P 500

Technical Analysis Charts – Consolidation and Energy Buildup Phase:

Momentum Rider has written numerous recent blogs supporting much higher prices for gold and silver in 2012 and for several years to come. In fact, we already explained the concept of consolidation phases and energy storage and buildup for bigger moves. Here is a quick snapshot of those previously published charts from our March 8th blog. This concept is important to understand because it supports our higher risk recommendation of accumulating in the right shoulder price areas without waiting for the neckline breakout on high volume.

Buying gold and silver right now does add risk to the trade because the right shoulder trough could breakdown. If the right shoulder price goes below the head’s low price, then the pattern is negated and the bigger move up in silver and gold may not happen as we anticipate.

Silver Energy Buildup Phase (Technical Analysis):

Gold Energy Buildup Phase (Technical Analysis):

Technical Analysis Charts – Inverse Head and Shoulders Pattern

Because of our fundamental and macro event premise that gold and silver will go higher in 2012 and for years to come, Momentum Rider believes that there is a bullish Inverse Head and Shoulders pattern forming in both gold and silver. Furthermore, for reasons that we discussed above and in our previous blogs on this subject, MR is recommending that you start accumulating gold and silver during this choppy period of consolidation in the right shoulder patterns right now.

Refer to the charts below for the recommended accumulation price range for your gold and silver buys. Also, you can add to your long positions after a breakout above the necklines as noted on the charts.

For gold, the accumulation range is between $1,585 and $1,740 with a neckline breakout level of $1,775.

For silver the accumulation range is between $29 and $34 with a neckline breakout level of $36.

MR recommends that you start accumulating gold and silver in the form of ETFs, mining stocks, coins, jewelry, or even bars if you have a good way of buying and storing the actual metal. But please be careful with any company you buy gold and silver from and those companies that claim they will store it for you.

Another parabolic move in silver and gold prices similar to what happened in 2010 and 2011 is very probable and it could be even bigger this time around. Using technical analysis studies and past experiences with large Inverse Head and Shoulders patterns in markets, the next moves up in gold and silver could start in April and the duration and size of the moves could be substantial.

The simplest and probably the safest method to accumulate gold and silver is to buy the ETFs. The Silver ETFs MR likes are SLV or SIVR and the Gold ETFs are GLD or IAU. Start buying in small amounts right now and on any pullbacks before the big momentum move really kicks in. Watch for Momentum Rider’s frequent updates on gold and silver prices in blogs and in the MR Power Stock Newsletters.

Keep learning more about technical analysis and look out for this very powerful Inverse Head and Shoulders pattern in the future. Take advantage of this investment opportunity in gold and silver as it could end up being one of the best things you could do for your retirement account in 2012.

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Stock Market Breakout Holds | Commodity Value Stocks

Technical Breakout Holds and Commodity Value Stocks

The market bulls overcame the key levels finally this week with a strong breakout yesterday. After numerous failures at these levels and a selling scare last week, the buyers reacted positively to the Fed comments yesterday along with some important bullish action in the financials.

We have been watching for 5 things to get more bullish overall about the market at these highs. It is one thing to get near old highs but it is another to get a breakout to new highs. The rule of thumb in markets is that new highs usually lead to more upside.

The five things we are watching to give us a bit more confidence about the technical breakout are:

1) The major markets need to hold their breakout levels (1,375 S&P 500; 3,000 COMP; 13,000 DJIA) – today was a good pause and hold day above them and these levels NEED TO HOLD going forward.
2) The financials have to participate for a more sustained move higher – yesterday was a huge breakout technically for financial stocks and it was good for investor confidence with a passing of their stress tests.
3) The DOW transports and the Russell 2000 have bounced strongly to close the huge divergence with the rest of the markets. This had to happen to push higher instead of having the major markets be pulled down with their recent weakness.
4) Oil prices needed to stabilize and that has happened in the last 5 days.
5) The long term treasuries needed to show significant weakness (selling) to signal the big institutions are finally more comfortable about putting money back to work in equities. That happened in a big way the last 2 days with strong selling and a breakdown in the TLT below the 200 SMA. The TLT could have small bounces from here but the intermediate trend is down and that is the key.

It has been an impressive move up of 6 days in a row after the selloff. However, once again we can’t provide an all clear just yet. In the short term, AAPL has gone parabolic again at close to $600 and the VIX bounced strongly today suggesting a pullback is close. A minor pullback to relieve the overbought conditions would be natural and retesting the key breakout levels for support is often very typical price action. MR has a hold recommendation right now.

Using the Power Stocks Table:
(1) Risk: Conservative (Cons); Moderate (Mod); Aggressive (Aggr); Speculative (Spec)
(2) Stop: Typically use a 3 to 4% closing stop below the entry price
(3) Trailing Stops: Use the 10 EMA (Swing) or 20 SMA (Short Term Trader) for protecting gains once above it; SMA = Daily Simple Moving Avg; EMA = Daily Exponential Moving Avg.

Commodity Value Stocks:

Many commodity stocks in materials, energy, and agriculture and related stocks in railroads and shipping are still at some very attractive valuations. The statistics so far coming out of the US in 2012 are much better across the board. China’s growth is slowing but it is still close to 8%, and the reports out of Europe are only indicating a mild recession.

And, because oil and some refined products are going up in price, many of the energy stocks should do better going forward with earnings. This is the second list of stocks in our investor series on value stocks in these sectors. This is an excellent investment opportunity to pick up some of these stocks at real bargain prices if you hold them for 12 months or more.

Top Commodity Value Stocks:

Investor Notes:

Gold and Silver:

Gold and silver pulled back a bit after the Fed’s release and their comments this week. Investors took the news as a reduced probability of QE3 and it was supportive of the dollar in the short term. But both gold and silver are still holding their longer term trendlines and are actually tracing out bullish inverted Head and Shoulders patterns. These are strong patterns for big moves up if they play out and our recent blogs support higher prices later in 2012. It may take some patience in the short term with some choppy price action but scaling in on weakness is still prudent for long term investors in our opinion.

MR will publish a blog later this week on the inverted head and shoulders patterns along with a list of some beaten down and good value plays in the gold and silver miners. Check our our recent blogs.

Gold and Silver Game Changers

Gold and Silver Investment Supplies Dwindling

Long Term Treasuries

Also, we wrote a very important blog in February about how the Long Term Treasury Bond yields could only go up. We were in fact correct as the TLT has been mostly lower since that blog. And, the last 2 days finally started the heavy selling that we forecasted for 2012. This is good for equities as this money will be put to work in stocks and it is a vote of confidence that things are getting better. Read that earlier post and look to buy the TBT (Ultrashort Treasury) for bigger gains this year.

Time To Short Long Term Treasury Bonds – A Safe Bet

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Gold and Silver Investment Supplies Dwindling

Gold and Silver – Falling Supplies with Inflation and Fiat Currency Concerns

This article details the dwindling supply of gold and silver in the mining and investor marketplace. The dwindling supplies of silver and gold coupled with fiat currency concerns and future inflation concerns will be major catalysts for exploding silver and gold prices. The price increases could start later in 2012 and will probably last for years to come.

The futures and currencies markets continue to show evidence of a major “de facto” assignment of gold as the world reserve currency. It is clear from the continue falling US dollar and troubled Euro that paper currencies are being trusted less and less by investors. Gold has been climbing relative to every currency for the last five years or more and it could be ready for an even bigger move. Fears are increasing concerning the inevitable inflation to come. And, many investors cannot forget the fiat currency specter of the past and are worried whether history will repeat itself.

And like gold, silver also has a monetary history, and it is acting in a similar way but just on a smaller scale – for now. Momentum Rider believes that silver probably offers an even better value proposition and a much higher upside than gold. If you look at some of the gold and silver ratios discussed later in this article, silver has a much better chance of getting a massive short squeeze in the market.

Gold and Silver Investor Supply Dwindling

The amount of gold and silver leftover for investors to buy is dwindling rapidly every year. That means that just like precious art, rare collectables, or any other popular shrinking supply investment, the prices will escalate very quickly when everyone realizes the supply is running out.

To get some perspective on the dwindling supply, in 2010 the world mined about 800 million ounces of silver and roughly 90 million ounces of gold. In addition, the amount of recycled silver from that year was about 220 million ounces and 55 million ounces for gold. So in one year, the total amount of gold mined and recycled was 145 million ounces and for silver it was approximately 1 billion ounces. The total amounts were about the same for 2011 and may even go down in 2012. As an aside, most of the mined silver supply comes from Mexico and Peru. It remains to be seen how stable and productive these two countries will be in the future for keeping the silver mined amount up. Any disruption in these two countries production would decrease the available supply significantly.

Examining the yearly demand side, 2011 saw non-investment demand for silver (industrial, silverware, jewelry, photographic, etc.) near 620 million ounces. That left about 380 million ounces for investor purchases. On the gold side, the non-investment use was about 15 million ounces so investors had 130 million ounces available. Looking at a yearly basis going forward and using current prices, the amount of silver to invest in is only a mere $12 billion dollars. The amount of gold to invest in every year is roughly $220 billion dollars.

Obviously, one must also consider the existing “investor owned supply” inventory of gold and silver as well. The most recent estimates have silver bullion at about 1.2 billion ounces and gold bullion near 2.2 billion ounces. Again, putting that into current dollar terms ($32/oz silver and $1700/oz gold), investors own silver bullion and coins worth 38 billion and gold bullion and jewelry worth 3.7 trillion dollars. That is the amount that could be recirculated at the right price from existing investor supply.

Key gold and silver ratios:

Silver to Gold Yearly Mine Production Ratio: 9 to 1 (see above)

Gold to Silver in the Ground Ratio (Economic/Mineable per USGS): 6 to 1

Physical Ratio of Silver to Gold Above Ground (CPM Group): 5 to 1

2011 Ratio of Investment Dollars Silver to Gold Ratio: 1 to 1

Current Gold to Silver Price Ratio: 52 to 1

Historically, in most of the 20th century, the Gold to Silver Price ratio was about 15 to 1. It is really only in the last 5 to 10 years that the ratio has increased dramatically in ranges from 35 to 1 up to 100 to 1. So looking at the other ratios above, it would seem reasonable that silver’s price would move up relative to gold quite a bit in the coming years. As an example, to simply get back to 30 to 1, silver would be priced at $60/oz if gold is priced near $1,800/oz.

If world government storage figures for silver and gold inventories are included, it is estimated that 60 million ounces of silver and about 1 billion ounces of gold are owned and stored by governments. And it should be noted that this amount is likely to grow going forward as many countries have been buying gold since 2009. And the governments, that sold over 3 billion ounces of silver between 1965 to 2000 are now mostly finished with silver sales. With only 60 million ounces of silver stored, they couldn’t affect the silver market pricing much anyway.

China, Asia, and India Could Try and Corner the Market over Time – The Hunt Brothers Part 2

Momentum Rider has no reason to believe that China, Asia, and India have any plans to collectively corner the market in silver or gold. However, they are massive speculators, investors, and consumers of both gold and silver right now. Without officially joining forces to corner the market, their collective buying power unleashed in the gold and silver market with the new planned exchanges could have the same end result. And the prices could end up doing what they did in the late 1970′s when the Hunt brothers tried to corner the silver market.

MR recommends that you start accumulating gold and silver in the form of ETFs, mining stocks, coins, jewelry, or even bars if you have a good way of buying and storing the actual metal. But please be careful with any company you buy gold and silver from and those companies that claim they will store it for you.

Another parabolic move in silver and gold prices similar to what happened in 2010 and 2011 is very probable and it could be even bigger this time around.

The simplest method is to simply buy the ETFs. Silver ETFS we like are SLV or SIVR and Gold is GLD or IAU. Start buying in small amounts right now and on any pullbacks before the big momentum move really kicks in. Watch for Momentum Rider’s frequent updates on gold and silver prices in blogs and in the MR Power Stock Newsletters.

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Decision Time Again for Stock Markets

Decision Time Again at Old Highs

This blog will focus on the high retest in the stock markets and also starts a new investor series on value commodity stocks.The stock markets suffered their first big loss of the year last week and it did break the short term trendlines – the 20 SMAs. However, to the bulls’ credit, they fought back hard on Wednesday, Thursday, and Friday to recover from that big loss. The moving average lesson still is a very good one to keep handy for investors as the IWM pullback followed it in textbook fashion. Furthermore, most stocks and commodities follow the same pattern as well. Knowing and applying its principles has personally made and saved me lots of money. And, the DJIA could still follow that moving average pattern.

It was fairly simple to look back on what caused the recovery bounce in the markets. The dip buyers stepped back in, Apple continued to hold steady (AAPL), a final last second Greek bond agreement was signed, some more positive US data was released, and probably a small short squeeze occurred to overcome the selling pressure.

So the stock markets are back to where they started last week for the most part.except for the DJIA which failed to close back above its 20 SMA on Friday. We added a few select positions back on Thursday and Friday in our portfolios in case a topside breakout occurs above the key levels this week (1,375, 13,000, and 3,000). But we left roughly 20% open stock positions in case of a pullback. The 50 SMAs are still very strong magnets if more heavy selling occurs this week.

Fundamentally speaking, the very low interest rate money (“free money”) available to institutions with a systemic risk that has been significantly improved in Europe seems to keep plenty of buying available. With that backdrop in place and without any Iranian crisis, it continues to be a bullish environment for the rest of March until proven otherwise.

The large divergence shown in last week’s DJ Transports and Russell 2000 Indexes charts remains but their move up with a small move down by the Major US Indexes would close that gap.

Momentum Rider is recommending a 10% to 20% reduction in equities on selling from here because the trendline SELL SIGNAL triggered last week is still in place. The key levels need to be taken out and held above for 2 consecutive days to negate it. (1,375, 13,000, and 3,000)

Using the Power Stocks Table:
(1) Risk: Conservative (Cons); Moderate (Mod); Aggressive (Aggr); Speculative (Spec)
(2) Stop: Typically use a 3 to 4% closing stop below the entry price
(3) Trailing Stops: Use the 10 EMA (Swing) or 20 SMA (Short Term Trader) for protecting gains once above it; SMA = Daily Simple Moving Avg; EMA = Daily Exponential Moving Avg.


Commodity and Commodity Related Value Stocks:

Many commodity stocks in materials, energy, and agriculture and related stocks in railroads and shipping are still at some very attractive valuations. The statistics so far coming out of the US in 2012 are much better across the board. China’s growth is slowing but it is still close to 8%, and the reports out of Europe are only indicating a mild recession.And, because oil and some refined products are going up in price, many of the energy stocks should do better going forward with earnings. So this week starts an investor series on value stocks in these sectors.

Investor Notes:

As promised, MR wrote 3 very important investor blogs on gold and silver over the weekend which everyone should read. There are still several more blogs planned this week on gold and silver that include our latest mining stock recommendations. Click the links below to read the new blogs.

Gold and Silver To Shine Brightly in 2012

World Macro Trends Driving Gold and Silver Prices Higher

Gold and Silver Game Changers

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