David Tablish | Oct 21, 2013 12:20AM ET
In this report I would like to show some charts explaining why I have made an abrupt short-term move out of our short positions in the precious metals complex. I know some of you think I have lost my mind but I can assure you that isn’t the case. Regardless if I’m bullish or bearish I’m always looking at both sides of the market, searching for clues pointing to either direction. This past week we got a major clue when the US dollar finally finished its third backtest to the bottom rail of the 11 point diamond top. It’s possible that gold and the US dollar can trade in the same direction for a while but I don’t think that will be the case longer term. So let's look at some charts for the US dollar first as that’s where the biggest clues exist.
A diamond is generally consider a bearish topping pattern but from my experience it can go either way. I’ve shown you some beautiful diamond consolidation patterns that worked out very well. It’s the same with the rising and falling wedges. Whichever way they break out will be the direction of the next move. It just so happens that our 11 point diamond pattern on the US dollar has broken down and out of the pattern. If the reversal point at #10 held and the price action rallied back up and through the top rail it would have been a consolidation pattern but that is not the case. After a month or so of backtesting the bottom rail of the diamond pattern it now looks like the move down last Thursday may be starting the impulse leg lower.
The first big miner I would like to show you is Rio Tinto (RIO) which actually had a double H&S top with a clean breakout to the downside and backtest. Over the last eight weeks or so the price action has been trading just above the neckline and now looks like it may be forming a smaller inverse H&S bottom right on the big neckline. It’s still possible it could trade back below the neckline but I have to give the benefit of the doubt to the smaller inverse H&S bottom until proven otherwise.
Just like the HUI, that doesn’t have a clear picture yet, and is leaving some room for further interpretation. Right now DUST is trading between the 50 dma and the 150 dma. As you know, we took a small starter position in the Direxion Daily Gold Miners Bull 3x Shares ETF (NUGT) based on the breakout from the smaller, rising wedge, blue dashed rails. The bigger rising wedge still hasn’t broken out to the downside yet. If it does, we can add more to our NUGT position. If DUST can rally back above the bottom dashed blue rail of the smaller rising wedge we would then have to exit our NUGT position.
The first thing the dollar would have to do to show it’s becoming positive would be for it to trade above the apex of the blue diamond. That would get my attention. The burden of proof now lies with the dollar bulls to turn things around.
I really believe that we are at the very beginnings of a major shift back into commodities again as the charts above are showing. It’s still very early in the transition phase but the commodities have basically been consolidating for close to three years now. With a long term consolidation pattern you get a long term move in the same direction leading into the consolidation pattern. The US dollar is key going forward and if it stays in its downtrend, commodities should benefit. It’s still very early yet so we have plenty of time to put together our portfolios.
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