Commodities Brief: Counter trend rally in precious metals or new trend being established?

The commodities sector had another strong day with gold, silver, and oil all finishing the day sharply higher. Even more impressive was the fact commodities did so on a day when the US Dollar Index finished well of the lows. When all was said and done, gold finished up 2.58% at 1467.50, silver finished up 5.36% at 24.35, and oil finished up 1.79% at 93.22.

Much of the buying in precious metals appeared to be technically related as recent consolidation patterns over the last 7 days in both gold and silver were resolved to the upside which most likely resulted in short covering. The daily gold chart had been forming what appeared to be a continuation “bear flag” pattern, which was negated today on a close above the upper boundary line of 1445. Furthermore, the silver chart which was forming a continuation “pennant” pattern which also failed with a close above the upper boundary line of 23.60. The measured move target on silver is now apx 25.60.

Both gold and silver are now trading above the 9dma which is a constructive development in the near term. However, both metals remain below the 20dma, which is sharply downward sloping on both daily charts which will be important to focus on in coming sessions.

Due to the fact the previous declines were so dramatic, support and resistance levels can be quite spread out. First resistance on gold sits at 1486.80 (the 20dma), followed by 1510 (previous support, now resistance on weekly chart from July 2011). Initial support sits at 1445 (previous resistance, now support from pattern mentioned above), followed by 1430. Initial resistance in silver is located at 25.60 (the measured move target noted above), followed by 26.30 (previous support, now resistance on weekly chart). First support sits at 24.00 (previous resistance, now support from April 16th), followed by 23.60 (previous resistance, now support from pattern noted above).

The impressive moves higher have many wondering whether this remains a counter trend rally in commodities or if there is a new trend being established. Often times when continuation patterns such as “flags” or “pennants” fail to and resolve in the opposite direction of the current trend, it can lead to follow through for more than a few days. It will be important to monitor if there is any further follow through in coming sessions.