Monday, October 22, 2007

Answer The Door

Was that short covering we witnessed in Gold today? Gold bounced this morning at 745.15 at 7:45AM. How weird is that? If I was basing my decisions on the Sun, the Moon, and the Stars I'd have probably covered my Gold shorts as well. Gold took quite a beating, falling $20 from it's 765 high in Asia Sunday evening, and bouncing at 745.

Much of this reaction in Gold can be laid at the feet of those charged with goosing the Dollar overnight following the G7 meeting this weekend in Washington. I seriously doubt this little punter's rally in the Dollar will last the week.

It is amusing that today's drop in Gold and Oil prices was attributed to "profit taking" by those that write the financial headlines. We have been expecting a reaction in both Gold and Oil for several days now. The reaction has arrived at our door step, and opportunity is knocking. It remains to be seen if today's low in Gold is all the depth this reaction holds.

Silver held up remarkably well today. But when you consider Silver's "value" in context to Gold, you shouldn't expect it to get beat up as bad. I have suggested all along that Silver would be the beneficiary of any reaction/profit taking in Gold. So far that has been the case. Today Gold was down 1.40% and Silver was down a mere .22%. Again it remains to be seen if the depth of today's action will be final.

In the Daily Silver chart above, a case could be made that the consolidation we anticipated from Silver in the month of October has played out exactly as scripted. Silver has traded in a range between 13.84 and 13.25 since the beginning of the month. The chart above shows clearly this consolidation. RSI is showing support around 50. This is common in a strong uptrend. Is there a risk that Silver may still react lower? Always. But to date, Silver has held it's own through two separate $20 reactions in Gold this month. A close below 13.25 could force the downside in Silver. Conversely, a close above 13.84 will force the upside in silver. A minimum move of .59 could result from a break in either direction. 14.43 to the upside, 12.66 to the downside.

Near term action in both Gold and Silver will likely be influenced by action in the Dollar. Bullish Divergence has been clearly established in the Dollar today, but it remains to be seen if it can overcome all that stands in it's way. A hard downtrend line off the August high, and old support turned new resistance at 78. With so many financial entities lined up to take a shot at the Dollar as well, any little rally here will/should be short lived and unlikely to surpass 79 on the Dollar Index.

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