As gold and silver continue a steady move up from recent lows they face a cluster of resistance. The cluster has been formed by the convergence of a number of popular moving averages.
Most charts show jagged price movement. The jaggedness makes it difficult to get a good handle on the trend. Moving averages were developed to smooth out the jaggedness to give traders a better picture of the trend. A moving average is simply a rolling mean where the average is calculated by discarding the oldest point in the data series and adding the newest point.
These days, the most popular type of moving average used in technical analysis of stocks is the exponential moving average (EMA). An exponential moving average uses a smoothing factor to give a higher weight to more recent prices and lower weights to the older ones in the series.
The most popular exponential moving averages are 20- day, 30-day, 50-day, and 200-day.
Although moving averages were initially developed to provide an idea of trend, over a period of time traders started using them as support and resistance levels. If the price is above a moving average, some traders believe that the moving average acts as a support; if the price is below a moving average, the moving average acts as a resistance.
As the chart shows the four popular exponential moving averages are clustered around the closing price of gold. A cluster such as this one usually provides strong resistance.
Gold faces a significant hurdle from the convergence of its 50- and 200-day EMA above its present price. The similar pattern presents itself on a chart of the GLD or IAU ETFs that track gold.
Silver, tracked by the SLV, is in even worse technical shape, battling to get above its short-term 20-day EMA. Silver producers like Pan American Silver (PAAS) and Silver Wheaton (SLW) are also battling their respective 20-day EMAs.
If gold backs off from here, it will simply mean that bulls do not have enough firepower and the metal�s downtrend may resume. On the other hand, if gold breaks out of here it may have a shot at the next resistance level around $1670.
Moving averages derive their power because a large number of traders use them. There is no judgment of fundamental quality regarding the security whose prices are used to calculate the averages.
The best way to consistently make money in gold and silver is to use adaptive algorithms, i.e., algorithms that automatically change in response to market conditions. The model described in the article, Listen To What Gold Is Saying If You Want To Make Money is still in effect.
Disclosure: I, my hedge fund, and subscribers to ZYX Short Sell Change Alert have positions in GLD, SLV, PSLV, and HL.
About Me: I am an engineer and nuclear physicist by background, have founded two Inc. 500 companies. I am the
chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Please write me: Nigam@TheAroraReport.com.
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