first majestic silver

Now What?

April 16, 2005

Summary and Conclusions

  1. The Fed will be highly motivated to cut interest rates to prevent the Primary Bear Trend in Industrial Markets from reasserting itself
  2. If the Fed does cut interest rates, the Dow will likely hold at around 8750 - which is above an important rising trendline
  3. If the Fed does not cut interest rates, the Dow "may" hold at around 7480, but this will have resulted in a downside penetration of this rising trendline
  4. If the level of 7480 does not hold, we will enter a new ball game.
  5. As yet there is no technical evidence to support a conclusion that the 7480 level will not hold
  6. Regardless of 1-5 above, we are entering a period of emotional uncertainty, where the gold price could fall to around $404 but, notwithstanding this, it looks highly likely that gold's Primary Bull market will remain intact
  7. Following a period of consolidation - which could see the $XAU fall to as low as 75 - the Primary Bull Market in gold shares seems likely reassert itself
  8. Long Term investors in Gold and Gold shares should hold

This is a time for cool heads to prevail. What are the facts? (Charts courtesy stockcharts.com, decisionpoint.com and bigcharts.com)

A) Industrial Market

Fact Set 1 (weekly charts):

  • There was a Parabolic SAR sell signal 3 weeks ago, alerting us to the possibility of a trend change
  • The Dow broke down through its 40 week Moving Average this week on relatively low volume.
  • The On Balance Volume chart is showing a slight tendency for distribution, but the 20 billion cumulative accumulation number still holds.
  • The MACD is heading south and, based on historical precedent, could continue south for the time being
  • There appears to be some support at around 10000

Fact Set 2 (monthly chart):

  • Parabolic SAR is still bullish
  • Price above 48 month MA
  • OBV shows a Double Top with subsequent falling tops and bottoms. However, current selling pressure (only half way through the month) has not yet been sufficient to penetrate the 50 billion cumulative accumulation level.
  • MACD giving a sell signal
  • Overall volume pattern - when scrutinised with care - shows the following:
    • Rising volume on falling prices between 2000 and 2003 (bearish)
    • Falling volume on rising prices between 2003 and 2004 (bearish)
    • Falling volume on falling prices, followed by rising volume on rising prices in 2004/5 (normal market behaviour)

Warning: Normal market behaviour was unable to sustain the rising prices above previous high. Fall below previous high is bearish.

Fact Set 3:

  • Point and figure chart on 3 box X 2% reversal has not yet broken down.
  • If it does break down, measured move target based on horizontal count technique will be around 8940 - which is still above the rising blue trend line
  • If a Primary Bear Market is to reassert itself, the measured move target using vertical count technique is believable, and comes in at around 7480 - which is still above five year low

Interim Conclusion

The MACD sell signal on the monthly chart appears to be the most significant indicator at present. Behind all the noise of trading, it appears that the market is preparing to head further south. Based on technical analysis, first level of support around 10000. If this breaks down, expect 8764. If this breaks down, expect 7480.

This analyst's "guess" (it can only be a guess at this stage): Expect to see 7,480 and expect that level to hold pending further fundamental deterioration. It seems possible that the Fed could reduce interest rates. If this were to occur, the level of 8,764 could hold - implying that the rising trendline will hold.

B) Gold/Silver Share Market

Fact Set 1 (weekly charts, but no volume available):

  • Parabolic sell signal given this week following break below 40 week MA 4 weeks ago
  • Rate of change accelerating to the downside
  • Relative Strength Index appears to be entering oversold territory
  • MACD still has downside potential
  • Price support at around 80

Fact Set 2 (monthly chart):

  • Price above 48 month MA and SAR
  • Rate of change indecisive (rise probably slowing down)
  • RSI sell signal
  • MACD still has downside
  • Price support at around 75 - flowing from both congestion at that level, and rising trendline at that level

Fact set 3: (based on 5% X 3 box reversal chart, and 3% X 3 Box reversal chart read together)

  • Break below 82.97 will yield a measured move target of 68.43 on 5% chart
  • This is consistent with vertical count measured move target of 68.92 on 3% chart
  • Next target based on horizontal count flowing from break on 3% chart is 82.29
  • If this level is broken, and 100% overshoot is reached on 3% chart, the level of 75 represents next target - which could hold.
  • If 75 level holds, it will be resting on the upward pointing trendline on both the monthly bar chart above, and the 5% P&F chart below

Interim Conclusion

Provided the 82.29 level holds, it seems likely that the XAU will remain in a Primary Bull Trend. If this level does not hold, the next downside target based on horizontal count techniques is 75. If this level is broken, the downside vertical count measured move target of 68.43 will likely be reached - indicating either a change is Primary Trend or the beginning of a Trading Range.

This analyst's guess: Proceeding from the base assumption that gold and gold shares are in a Primary Bull Trend, the 75 level should hold

C) Gold Bullion

Fact Set 1 (based on 3% X 3 box reversal chart):

  • Gold price above arising trend
  • Buy signal still intact, and will only be aborted if gold falls below $404
  • If this level is penetrated on the downside, measured move target based on horizontal count technique is $350 - which is above the rising blue trendline
  • Horizontal count target on upside is approximately $495

Fact Set 2: (Based on weekly bar chart)

  • Non confirmation of rising bottoms on price chart and falling bottoms on PMO chart
  • Uncovered Gap between 430 and 440
  • Price above rising trend line and 43 week Moving Average
  • If this trendline is broken, the next support level is $400

Interim Conclusion

At any level above $350, the Primary Bull Market remains intact. The non confirmation of the PMO is pointing to a possible breakdown through the steeply rising trendline

This analyst's guess: The $404 level will hold, pending a resolution of the direction of the Industrial Equity Market. If the Industrial Equity Market falls below 7334, we will enter a new ball game.

D) Gold Relative to DJIA

Fact Set 1: (Based on weekly bar chart)

  • Upside Gap indicates emotion
  • MACD giving buy signal
  • RSI still has some upside
  • Upside resistance at .045 level

Fact Set 2 (based on 3% X 3 box reversal chart)

  • Bull market in Gold Relative to Industrials is intact
  • Break up above 42.95 level will yield upside move of 36% in ratio based on both horizontal and vertical count techniques

Interim Conclusion

The relationship of Gold and Industrials is entering a period of emotional volatility which could take some time to settle down. Based on confluence of horizontal and vertical count techniques, the target of the ratio is 42.1*1.36 = 57.25

Given that the target of Gold is $495, the target of the Dow Jones Industrials is 495/.05725 = 8645

Overall Conclusions

See Summary and Conclusions above


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