Gold and Silver Chart Patterns: an update

In my previous post on Gold and Silver Chart Patterns, I had mentioned about a pair-trading opportunity. Going through that post, I realised that instead of recommending 'long gold, short silver', I had written the exact opposite.

For any one who had read through the entire post, it would have been clear that I was bullish about the gold chart and bearish about the silver chart. However, as a penance for the error, I'm going to refrain from making any more trading recommendations.

Gold Chart Pattern 

Gold's price dipped below the rising 14 day SMA, but was well supported by the 30 day SMA. By Fri. Jun 17 '11, gold's price managed to close above the 14 day SMA - indicating that investors are using all dips to buy.

As long as the recent high of 1565.70 - touched in Apr '11 - is not surpassed, the bears will try to make life difficult for the bulls. But may not be for long. A bullish ascending triangle appears to be forming on the gold chart, from which a likely upward break out can easily take gold's price past the 1600 mark.

Stay invested with a trailing stop-loss. Buy on a break out above 1550.

Silver Chart Pattern 

Silver's price chart continues its consolidation within a symmetrical triangle, and is now trading below the 14 day, 30 day and 60 day SMAs. Triangles tend to be unreliable, but are usually continuation patterns. Since silver's price entered the triangle from above, it is likely to break below the triangle and test support from the still rising 200 day SMA.
Buy if there is a sharp upward bounce from the 200 day SMA.

Changes in Sensex constituents

Just read the news that two of the BSE Sensex stocks that have been real laggards are going to be replaced. This should come as a blessing for the bulls. Without any change in the macro environment, the Sensex will be able to recover some badly lost ground.

In this post written a couple of months ago, I had written: 'Dropping Rel. Comm. and Rel. Infra. from the index would not hurt either.' Those are the two stocks that are being replaced by Sun Pharma and Coal India. Expect a spurt in the prices of the two new entrants as index funds will be forced to replace the two ADAG stocks.

The bad news? The changes will come into effect only from Aug '11.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jun 17, ‘11

The bears were determined to drive home their advantage from the previous week. Even though the repo rate hike of 25 bps by RBI was widely expected, I had mentioned the possibility of more selling in last week's post. Why? Because both the BSE Sensex and NSE Nifty 50 indices are technically in bear markets. Repeated interest rate hikes do not help the bullish cause.

BSE Sensex Index Chart

The only good news for the bulls was that the index tested but didn't break the support level of 17780. It may only be a temporary reprieve. All the technical indications are bearish.


The blue down trend line is under no threat of being breached. All three EMAs have turned downwards, and the Sensex is trading below them. Note how the falling 20 day EMA resisted all efforts at an up move during the week.

The MACD is negative and has slipped below its signal line. The ROC is also negative and below its falling 10 day MA. The RSI has dropped below the 50% level. The slow stochastic has entered the oversold zone. A fall below the Feb '11 low of 17300 can lead to a deeper correction.
 
Nifty 50 Index Chart

The level to watch in the Nifty chart is the Feb '11 low of 5180. There is a good chance that the Nifty will fall lower because there are no positive triggers for the market, and the FIIs have been net sellers.

Retail investors are almost out of the market, so the FII selling is being absorbed mainly by the DIIs. The question is: when will the FIIs resume buying? The US and European markets are sliding. So are the Asian markets. Commodity prices have already been bid up to high levels. The time-wise correction in the index is almost over. Valuations are no longer expensive.

There seems to be maximum pessimism around. Retail investors are fearful of a big fall. Good time to play contrarian, but one has to pick stocks carefully. 

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns are poised near important support levels. Things aren't looking good for the bulls. Both indices can lose another 2-3% from current levels easily. Stay out if you are a conservative investor. Any buying should be done with a 2-3 years time frame.