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Precious Metals: Critical Support Test Ahead

The entire commodity sector is facing a critical support test over the next several weeks. We have made the case is past articles that commodities as a whole are bottoming, having hit 40+ year lows on both an absolute (US dollar terms) and relative (compared to stocks) basis during the first quarter of 2016. However, what has not been known is what shape the bottom process would take: would it be a 3-4 year affair or something that drags on for over a decade, potentially?

Pending Critical Support Test for Precious Metals

Importantly, much of the time, precious metals will take a primary cue from the direction of the broader commodity sector. Whether we are strictly involved in precious metals, or other commodities additionally, this development will impact us.

Below is the critical support test that is pending, with the longer-term view and discussion following:

How do we know this is a bottoming process? The commodity complex is at 40+ year lows, in a support zone which has corresponded with important previous bottoms since 1975.

Commodities had fallen 67% since the 2008 high to the 2016 bottom. This, for an asset class that cannot fall 100%.

On the first short-term chart, note the 9 attempts (red arrows) since late 2015 to break higher from the (black) resistance zone between 197 – 203 on the index. These multiple attempts to overcome a specific zone of sellers are what define a stage 1 base resistance zone.

Unless commodities are about to become cheaper than they ever have been in the post-Bretton Woods era, then the three-year upward-slanted process since 2016 represents a distinct bottom within a historical high-probability zone for such to occur.

Support Test Ahead

Since the most recent failed breakout attempt that occurred in early October, commodities have fallen by approximately 9%, from 206 to 184 on the index. The critical support test that is coming up is highlighted in red, where the sector will test support from the following three levels:

  • The 50% Fibonacci retracement of the entire advance off the 2016 bottom, coming at 181 (light silver lines).
  • Rising 2016 – present support (blue), which comes in at 178.
  • A range of horizontal support which exists between 176 – 178 (black lines).

In sum, this is a fairly strong confluence of support which exists between the narrow 176 – 181 range on the CRB, and for the week, the index closed just at 187. This support zone is the next obvious level for the sector to test on the downside, and it needs to hold.

What is the Significance of this Support Test?

Whether or not the CRB can hold above this support zone will tell us much about what trajectory we should expect for most commodities into the 2020’s.

The primary question is: will a new bull market in commodities arrive within the next 12 – 18 months, or will this be delayed by perhaps 1-2 decades?

We must recall that there are precedents for the commodity sector to move sideways for decades at a time.

Consider the period following the 1980 peak in commodities and precious metals: after falling by 47% from 1980 down to the 1986 low, the sector moved in a wide sideways range as a net sum for 16 years, until it began to break higher in 2002. These cycles are showing by the red, blue, and green arrows, respectively.

A 6-year bear market → 16 years of basing → a 6-year bull market… this is what transpired from 1980 – 2008.

Fast Forward to the Present

The commodity complex has now finished an 8-year bear market following the 2008 peak. Is it ready to enter a new bull market so soon, or will another multi-decade basing period be necessary first for excess supply to be worked off by the consumption of industry?

The price action over the next several weeks and into the first quarter of 2019 as the sector tests the support zone above will tell us much about this pending expectation.

A bottom is clearly being put into place. But: how long until the next bull market?

We will need to adjust our strategy depending on the answer to this question.

A quicker-arriving bull market in commodities would warrant taking positions into the next decline for a buy-and-hold strategy. Lasting for another 5 – 6 years at the minimum.

A lengthy consolidation would mean that such a buy-and-hold strategy would likely result in “dead money” for another 1-2 decades. As occurred during the late 1980’s and 1990’s. In such an instance, a multi-month or multi-year trading plan across diverse commodities, including precious metals, will be the best strategy: buying at relative lows, and selling at relative highs, repeatedly.

Takeaway on Commodities

The precious metals take a large portion of their buying and selling pressure from the rest of the commodity world, and silver especially-so. The commodities have been basing for nearly 3 years under clear stage 1 resistance. Now facing an important support test in the 176 – 181 zone. How this support test resolves will tell us much about what to expect. Especially for the sector into the next decade and possibly beyond.

A bull market must maintain a semblance of a rising structure. This is in order to properly accelerate. Additionally, the pending support test is the last “line in the sand” for the health of the current attempt.

We should monitor this test and use the information to help set our bias. Toward either a buy-and-hold or an intermediate-term trading strategy over the next several years.

*****

Finally, a happy Thanksgiving to all the readers here in the United States. We truly do have much to be thankful for.

CHRISTOPHER AARON

BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.


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