Financial market chaos continues with broad volatility levels shaking out traders on both sides of the trade. Perhaps the most surprising events of the last several weeks have been the declines in gold and silver, which are both assets that tend to see strong buying activity during times of risk and heightened uncertainty.
At the same time, even the most bearish precious metals traders must concede that successful asset class selection in this market environment has been a nearly impossible task. Everything, from tech stocks, to high-yielding currencies, to consumer staples have been sold with incredible levels of trading volume that have deeply impacted markets. In other words, there really has been nowhere to hide as the “rush to cash” has defined market trends for the past several weeks.
Recent support levels have been established in GOLD/USD near the $1,445.90 level. This level was the critical “line in the sand” that I mentioned in my last article and it would appear that this price zone has established a high level of accuracy. Based on my Ichimoku price analysis shown above, gold has moved back into the Kumo (the cloud indicator), which suggests sideways consolidation rather than further declines. Additionally, the CCI indicator reading is turning up from oversold territory and this is a strong confirmation of the initial trading signals.
If we move into the 4-hour charts, we can see that gold has very good potential to break through the Kumo cloud structure. Short-term resistance levels have been broken in a consistent fashion, so an upside break of the Kumo would be a highly bullish event.
Pivot point readings on the stochastic oscillator charts continue to suggest bullish follow-through, however, we are also in overbought territory on the short-term charts and this means we will probably see a period of consolidation before we are able to see a strong surge higher in the price of gold.
It might be more encouraging, however, to look at the technical analysis framework that is currently unfolding in SILVER/USD. At first glance, it would seem as though the price structure is largely similar to what we initially saw in GOLD/USD. But this is where the magic of technical analysis indicators can really offer us a strong dose of objectivity because we can see that silver markets have not yet broken through the cloud base.
Daily charts for silver also show the extent to which prices collapse in the rising market volatility. Since nothing has changed in the fundamental picture for silver in the last six weeks, these declines indicate extreme price moves that are likely to reverse quite sharply if the Ichimoku cloud structure on the 4-hour charts can be overcome.
Of course, we are still outside of the long-term highs that characterized the precious metals markets after the financial crisis more than a decade ago. This means there is clear scope for a dramatic surge in silver prices that could surpass any rallies in gold without much difficulty.
In my view, what is most likely is that a primary breakout in the price of gold could actually work as a precursor to similar moves in the other major metals (particularly in silver and platinum). If this turns out to be the case, sentiment could turn quickly for the entire metals complex and even influence price moves in the gold mining stock sector. As a result, the total moves could be widespread throughout market sectors and silver still has the potential to outperform gold once these moves start to accelerate in speed. Now that we have a basis for the broader outlook in precious metals, it is important for traders to move forward with positioning only after a clear pivot strategy is developed. When major volatility levels cause breaks in long-term support and resistance zones, stochastic readings tend to reflect underlying trend changes that might not be visible using all types of timeframe analysis.
On the 45-minute charts, we can outline some specific price levels that can be used to establish new trades into next week. Precious metals traders likely understand that broader volatility throughout the market has already reached levels that are above anything else we have seen in the recorded history of the financial markets. But as long as traders understand all of these important factors, it is reasonable to start planning a post-collapse trading strategy that can be used once volatility levels begin to normalize throughout the market. When the markets finally establish a clear turnaround, most of the high reward trading opportunities that can still be found in the market might be centered around assets that are lagging their more popular counterparts from the same asset class.
This is why I expect market valuations in silver to have a chance at outperforming the upcoming trend trajectory that is most likely to be encountered in gold markets. Traders can view the support/resistance levels that I have outlined above as a way of identifying how far down bullish traders can reasonably expect price action to be contained. In my regular market analysis, these specific market price levels are usually defined using pivot point trading parameters that determine supply and demand zones. These price zones must be addressed using stop loss levels and profit targets that are structured using traditional metrics of risk and reward. Based on the technical analysis strategies outlined in this commentary, we can see that there are increasing probabilities which suggest that silver is going to experience more upside potential when compared to the new trends that are most likely to emerge in gold.