Market experts are confounded as crude oil, gold and silver break inter-market relationship and sell off along with the dollar.
Generally, the major commodities move inversely to the price of the dollar. However, over the past few days, the dollar has been falling, along with commodities such as gold, silver and crude oil. The reason is not complex. The inter-market linkages don’t work all the time. Over the past few days the risk appetite has increased in the market, leading to a fall in gold, the dollar and to a certain extent in silver.
Whenever there is uncertainty in the market, both gold and the dollar rally. Silver tends to follow gold. However, the fall in the crude oil price has surprised many. The reason can be attributed to the fact that crude oil has risen significantly and is close to its resistance level. The resistance level for sweet crude is at $96 a barrel and the price has been coming close to $94 and selling off.
Since the traditional inter-market relationships are not working right now, what does the market player do? They should focus on the demand-supply levels of individual commodities. In all trading, the demand-supply levels of the individual asset classes are more important than other factors such as relative markets and fundamentals. So let’s look at gold, silver and crude oil to find their respective demand and supply levels.
Gold
The precious metal made a triple top by touching the high of $1,430 level an ounce on November 11, 2010, then on December 7, 2010 and finally on January 3. The mini-sized continuous gold contract has sold off after the January 3 high to make new lows. Right now, gold is approaching a support level of $1,300 and closed at $1,332 last Monday. Providing additional support at the 1,300 level is the 30-week simple moving average, which is used by long-term investors to identify market trends and to take or exit positions.
If the average is moving up the way it is now for gold, long-term investors buy a pullback to it. On the contrary, if the average points down, traders short a rally up to it.
We would go long on gold near the 1,300 level to see if it rallies higher. However, if gold closes below 1,300, we’d no longer stay long. A close below 1,300 can take the precious metal all the way down to the 1,200 level. This level was previous resistance and can now turn into support.
Silver
In our previous articles, we had mentioned that silver could fall much more than gold due to its parabolic rally. This forecast has come true as silver fell slightly over 15 per cent from its most recent peak. Silver is now near key support levels of $26.15, followed by the $25.25 level and finally the $23 level.
The $22.97 level is very interesting as it lines up with a Fibonacci retracement area. Fibonacci retracements are watched by several technical market players to find areas of reversal. The key levels of retracement are 23.6 per cent, 38.2 per cent, 50 per cent and 61.8 per cent. To find retracement levels, traders take the origin of a rally and the peak to anticipate how far down prices can correct. Silver did have a bounce at the 23.6 per cent retracement level with $17.82 as the origin of the rally and $31.29 as the peak. The $26.15 area is the 38.2 per cent retracement level and $22.97 is the 61.8 per cent retracement level.
These retracement levels are good buy levels with stops below to limit the losses.
Crude oil
Crude oil has not been able to break the $94 a barrel level for quite some time. The commodity was holding support at $88.50, but broke that level on Monday after Saudi Arabia announced it would increase production. Crude, too, has been its own master not adhering to the traditional relationship of moving inversely to the dollar.
With the $88.50 support level broken, the next levels of support are $85.25 followed by 82.50 to 82.75 a little lower. Also, with the sharp fall over the past few days the level between $92 and $94 can prove to be resistance once again if crude rallies.
The author is based in Chicago and is the editor of www.capturetrends.com
