Technical View: Gold, Silver, Dollar

Last week's price action unfolded just as we expected. Money poured into stocks with the focus being on small-cap, bank and technology stocks. The fact that these sectors are showing strength while utilities, health care and consumer staples lag is a good sign that investors are once again taking risks in the market.

Because investors and traders are bullish on the stock market again, the money flow into the safe havens like gold and silver are decreasing. I believe this is the reason stocks moved up last week while precious metals drifted lower.

Below are three charts (dollar, gold and silver) showing what I think is most likely to happen in the coming week or two.

Dollar Index Daily Chart

The dollar has put in a very nice bounce/rally since the low in November 2009. Last month the dollar index finally reached a key resistance level of 81. I have been talking about this major resistance level since January, noting the dollar would find it difficult to break above this level.

Take a look at the daily chart below. You can see a head-and-shoulders pattern and a neck line, which appears to have broken late Friday afternoon. There is a strong chance the index could reach 78, which is the measured move down. If we get follow-through selling this week then I would expect 78 to be touched within five to 10 days.

SPDR Gold Shares and iShares Silver Trust Trading Charts

Precious metals have been moving very well for us recently. Using technical analysis we were able to catch the Feb. 5 low and also the Feb. 25th low on several ETF's.

As you can see from the charts of SPDR Gold Shares ( GLD) and iShares Silver Trust ( SLV), both metals are now in an uptrend, showing bullish chart patterns and trading at support. If we see the dollar break down next week then be ready to go long gold, silver and stocks.

Trading Conclusion

As a technical analyst the above charts are pointing to higher prices in the coming days, which is exciting for us all. But when things are this perfect looking we must be very cautious as the market can suck people into setups like this and spit them out a couple of days later for a nasty loss.

Understanding how the market moves is crucial for avoiding and/or minimizing losses when trades go against you. That is why I continue to wait for my signature low-risk setup before putting any money to work.

My focus is to make the lowest number of trades possible each year, only focusing on the best of the best setups. My low-risk setups require downside risk to be less than 3% for the investment of choice when the broad market shows signs of strength. I use several different types of analysis to confirm if a setup has a high probability of winning, and those that do are the trades I take along with my subscribers.

It is very important to wait for the market to confirm a move higher before taking a position with this type of setup. The market could go either way quickly, and jumping the gun is not a safe bet.

If you would like to receive my free precious-metals trading reports, please visit my Web site: www.GoldAndOilGuy.com

At the time of publication, Vermeulen had no positions in securities mentioned.
Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.