Sunday July 22, 2012

Weekly Market Update:Gold, Silver, Crude Oil, EUR/USD, S&P500(Note: Exponential moving averages: pink = 21 period, purple = 55 period, blue = 200 period)

GOLD

Gold continued to trade in a narrowing consolidation range last week as it has for the past 10-weeks. This pattern is a symmetrical triangle which many times willprecede an explosive move. A smaller symmetrical triangle has formed within the larger over the past couple of weeks. Near-term resistance of that smallertriangle is from 1599 to 1601.20, which matches resistance of the 55ema on the daily chart. Trade above that zone will move gold out of the short-termconsolidation pattern and into the larger symmetrical triangle once again. It will then target the higher downtrend resistance line.

Daily Chart

At this point a breakout could occur in either direction but downside pressure remains dominant. For the past five-months the trend has been down and remainsso with gold below the 200ema on the daily chart and the 55ema on the weekly chart. The shorter term 21ema is very close to moving below the 55ema on theweekly chart. Also, the larger price pattern from the September 2009 high is bearish taking the form of a descending triangle. The 55ema crossed below the200ema on the daily chart in May for the first time since early-2009 and remains below it, and each is pointing down. Regardless, we don’t have to know thedirection before it occurs. Watch for a signal up or down and then take the appropriate action.

An upside breakout of the larger symmetrical triangle pattern will first occur on a close above the downtrend line, with gold then targeting a resistance zone from1625 up to 1640.89. This price zone consists of several swing highs as well as the 200 daily exponential moving average (ema), which is now at 1627.86.

Once a daily close above the higher price level occurs an upside breakout of the symmetrical triangle bottom is confirmed. Also, the pattern of lower swing lows ofthe downtrend will be broken indicating a reversal of the five-month downtrend has probably occurred. The next higher resistance zone would then be from1658.75 to 1671.60. That zone is identified from the following indicators:

1658.75 - 50% retracement of the full downtrend off the late-February highs1662.16 - measured move completion (second leg up off the bottom matches the first leg)1563.26 - 78.6% Fibonacci retracement of the internal downtrend1671.60 - prior swing high resistance

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Weekly Chart

A downside breakout is first indicated on trade below 1554.96. Gold then targets the 1531 to 1522 support zone. Keep in mind that the long-term pattern on goldis a bearish descending triangle reversal (discussed in prior weeks). However, it is not validated until a daily close occurs below 1522, the horizontal bottomsupport of the pattern. In that case expect downside momentum to accelerate.

Silver

A tightening short-term consolidation pattern has also been forming in the chart of silver over the past couple of weeks. The pattern has taken the form of anascending triangle where horizontal resistance lies across the top and higher lows across the bottom. Ascending triangles are generally considered to be bullishas they have a tendency to breakout to the upside. This particular ascending triangle pattern is occurring within the second bottom/low of a potential bullishdouble bottom pattern.

Daily Chart

Trade above $27.62 is needed to trigger a breakout of the small ascending triangle, which will also put silver above the downtrend line, another sign ofstrengthening. Resistance is then at $28.45, the top of the double bottom pattern. A move above the internal downtrend line increases the odds silver willeventually rally up to the long-term downtrend line.

Once triggered the double bottom measuring objective gives a target of $30.79 for silver. But first silver would have to exceed the $29.89 swing high from early-June, and a resistance zone from around $30.44 to $30.55, consisting of two Fibonacci resistance levels and the 200ema.

Weekly Chart

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Silver has a zone of support from approximately $26.90 to $26.45. A decline to below that zone will see silver next target approximately $26.10 to $26.00. Tradebelow $26.00 and a subsequent close below that price, gives a very bearish signal and triggers a breakdown of a large bearish descending triangle price pattern.The first significant zone of support would then be around $21.31 to $19.46.

Crude Oil

The uptrend in crude oil has continued to progress higher after triggering a trend continuation on trade above $88.95 and rallying above the 55ema, a medium-term trend indicator. A 50% retracement of the full downtrend was almost reached last week with oil hitting a high of $93.22. The 50% level is at $93.90. Note thatthe 55ema on the daily chart has now joined the 21ema in turning up, confirming the strength seen in price. Watch for the 21ema to cross above the 55ema forfurther confirmation of strength.

Daily Chart

Oil has not yet reached overbought levels on the Relative Strength Index (RSI) and shows several higher target levels above last week’s high. This would indicatethat oil has more upside. That doesn’t mean it won’t have a pullback in the meantime, and you need to watch for that.

The next price zone where there is confluence of several measurements is from $95.28 to $92.32. This zone includes the 61.8% Fibonacci retracement of theshorter internal downtrend, and the objective of a measured move off the bottom, where the second leg up matches the first leg. Oil could still continue to rallyabove that zone, and if it does would then target the $97.30 to $97.83 price zone, consisting of the 200ema and 61.8% Fibonacci retracement of the fulldowntrend.

Another bullish sign is that oil triggered an upside breakout of an inverse head and shoulders (H&S) reversal pattern last week as it moved above $89.77. Theright shoulder of the pattern is much higher than the left and reflects underlying strength. What’s interesting is that the target based on the pattern is around$100.91, inclusive of the psychologically important price of $100 per barrel.

Weekly support is now at $86.39, followed by $83.63. As long as oil can stay above $86.39, it continues to have a chance to move higher eventually. Trade below$83.63 increases the risk of further declines.

EUR/USD

The recent short-term rebound in the EUR/USD was mediocre at best with the pair unable to reach either the short-term 21ema trend indicator or the 38.2%Fibonacci retracement level. Subsequently selling pressure returned with a vengeance on Friday driving the pair below the prior low of 1.2162 from July 13, beforeclosing at 1.2159. So far the EUR/USD has only dropped slightly below the July 13 price level and needs to fall further to give a decisive bearish indication.Regardless, it does look like a bearish continuation of the short, medium and long-term declining trends has been triggered. On a weekly basis we continue tohave lower highs and lower lows, the definition of a downtrend.

Daily Chart

The low hit two weeks ago which led to a bounce, 1.2162, was almost an exact match with the 127.2% Fibonacci extension of the prior rally from June. Therefore,the next extension level of the same trend is where support may be seen next. That extension is the 161.8% Fibonacci measurement, which comes in at 1.2090.This price level is short-term in nature as it measures the extension of a secondary rally within the larger downtrend. Prior support from June 2010 is then at1.1876.

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4-Hour Chart

If instead of continuing lower in the near-term the EUR/USD bounces from Friday’s close, watch for resistance to be found which turns the market back down. Atest of the uptrend line as resistance would come in around 1.2234, which would also complete a 50% retracement of the short-term downtrend.

S&P500 Index

The S&P500 Index futures strengthened earlier in the week before hitting resistance at 1375.75 on Thursday, right in the area of the prior swing high at 1374.75.Therefore, a trend continuation signal for the uptrend has failed with the index back in retracement mode within a larger up trending parallel channel. The logicalprogression in the short-term is that the index continues to fall further towards support of uptrend line.

Daily Chart

There’s still a chance that support will be found at or above the uptrend line which then turns the S&P500 Index higher, giving it another chance to get aboverecent highs. The Relative Strength Index (RSI), a measure of momentum, has not yet reached overbought and the 21ema continues to progress higher aftercrossing up through the 55ema. Each indicates that the S&P500 Index could still move higher. But first it looks like a deeper pullback lower towards support of theuptrend line will occur. Where support is found on the way down in the near-term will tell us something about the underlying strength of the larger uptrend. If themarket turns back higher before reaching the uptrend line that would be a stronger indication than if it gets all the way to the line before turning higher.

The other scenario is that a top has been reached for now which could see the index test prior lows. Last week’s high combined with the prior swing high sets upa potential double top pattern. A breakdown of the double top is triggered on trade below the most recent swing low at 1330.25. That would also put the indexbelow the daily 200ema. Resistance of the double top highs came in just below the 78.6% retracement of the prior downtrend and is therefore a logical price areafor the market to find formidable resistance that could hold. Based on the double top pattern, the target for the index would be 1263.75. That price level is almostan exact match with the recent low of 1263 from early-June.

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Daily Chart

Bruce Powers, CMTHead of Research & Analysis

T: +971 4 4405902F: +971 4 4405901E: bp@tsecurities.comW: www.tsecurities.com

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