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General Market Commentary
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General Precious Metals
Commodities Set Up for a Rally?
Commodities, including gold and silver, have plunged to become so deeply oversold that a snapback rally looks likely soon. This could be sharp and could trigger a wave of short covering. Such a rally is likely to be sparked by a dollar reaction, as we will see, but it is likely to be followed by further heavy losses across the sector if a general market crash ensues as expected.
We will start by looking at the latest dollar index chart, as a dollar reaction will be what ignites a commodity rally. The 2-year chart for the dollar index shows that the dollar is rounding over beneath a zone of resistance that dates back to a reversal that occurred at this level last October and November. The pattern that has formed from last July looks like a large head-and-shoulders bottom, with the right shoulder of the pattern about to form.
If this is what it is, it implies that the dollar will in due course go considerably higher to the 102–104 area, which we can expect to happen during the market crash phase. But first there is the little matter of the right shoulder forming to balance the pattern, and if a more or less symmetrical right shoulder forms, then we are looking at the dollar dropping to the 91–92 zone over the near term, which will be sufficient to generate a significant snapback rally in commodities—which, as mentioned above, is likely to be magnified by short covering. That is the theory that I have and which is mine and what it is too.
So now, let's proceed to review the charts of a range of important commodities: copper, gold, silver and platinum, which will give us more of an idea regarding how likely it is that they will soon rally. The 1-year charts are selected to enable us to relate them directly to the COT charts, which are also for 1-year.
Starting with gold we see that it has accelerated into a deeply oversold state on its MACD indicator and relative to its moving averages, with the drop from its April peak clipping $150 off its price. Clearly gold didn't take kindly to the dollar's latest rally. Gold's accumulation line has held up well, however, which increases the chances of a snapback rally imminently, which will be augmented by sudden short covering, as mentioned above.
Not surprisingly, gold's COTs have improved substantially as this drop has unfolded, and this past week arrived at a level that is construed as bullish, as the manic-depressive and wrong Large Specs gave up on gold in increasingly numbers. These are the best readings we have seen for a year, and while they don't guarantee an immediate rally, they make one highly likely.