Moving on we now consider the 2-year chart for oil. We have been rather unsure what to make of oil for some time, but now the picture is becoming clearer. It too is weakening in a similar manner to copper and the broad market. It too broke well below its 200-day moving average on the recent drop and challenged its February lows. While the pattern is not so clear as it is with copper and the S&P500, it too appears to be completing a Head-and-Shoulders top, bouncing now to mark out some kind of Right Shoulder.
Oil stocks have fallen heavily in the recent past, partly due to the BP fiasco in the Gulf of Mexico, and oil stock index charts are starting to look decidedly bearish, with a bearish moving average cross imminent. We correctly predicted last week�s sharp bounce off the lower boundary of the bearish Broadening Formation shown on our 2-year chart for the OIX oil index. A weak rally is now expected that is unlikely to take the index beyond its moving averages before it rolls over and heads south again.
Having painted the backdrop, let�s now see how the Precious Metals sector fits into all of this. We will start by considering the silver chart, move on to the HUI index chart and the S&P/TSX Venture Comp index and end with gold, the reason being that gold is the only chart amongst all those presented here that still looks, on the face of it, quite resolutely bullish, and is thus anomalous.
On the 5-year chart for silver we can see that it is now at a critical juncture. Unable thus far to break above the strong resistance approaching its early 2008 highs, it is clearly in danger of Double Topping with those highs, and with the more recent highs of last December. Early this month it had been looking poised to break out upside at last, but after the ugly turn of events of recent weeks, it is clear that the chances of an upside breakout have diminished considerably. If it doesn�t succeed in doing so on the current broad but limited recovery rally, which is thought unlikely, it will open up the risk of a plunge, especially given the current tight bunching of price and moving averages, which although bullishly aligned, will quickly swing to negative.
The 5-year chart for the HUI index shows an almost identical situation to that which exists in silver, with stocks Double Topping with their early 2008 highs and more recent December highs. What is expected to happen is that PM stocks rally feebly with the broad market, as it marks out the Right Shoulder of its H&S top, and then they crash once the market breaks down below the neckline of the H&S top, and as we can see on this chart, it�s a very long way down from here. PM stocks had been showing signs of breaking ranks with the broad market in recent weeks, but are likely to be overwhelmed by the ferocity of the decline in the broad market should it break down from its Head-and-Shoulders top.
The 15-month chart for the HUI index shows recent action in more detail. On this chart we can see that the index did not break down from its uptrend in force from last February on the recent severe drop in the broad market, which is actually quite impressive. However, this uptrend can be expected to fail in once the broad market breaks down from its H&S top, and given the tight bunching of the index with its moving averages, this would be expected to lead to a 2008 style plunge. In favorable market conditions may rally up towards 500 in coming days or weeks. Break of the uptrend shown will be viewed as a general sell signal for the sector.
The 1-year chart for the S&P/TSX Venture Comp index looks ominous with this index having dropped back to make a low beneath its February low and test support in the vicinity of its 200-day moving average. Having arrived there in a very oversold condition as shown by its MACD indicator it is now bouncing to form what should turn out to be the Right Shoulder of a strongly bearish downsloping Head-and-Shoulders top. This bounce should be utilized as a final opportunity to unload positions and possibly short this market.
