Spot Price Up Nearly $1 Per Ounce in Active Trading

July 18, 2011 Justin Technical Analysis

Spot prices opened the week with a breakout above the last major area of resistance from back in early May. The metal traded as high as $40.70 in the early part of the New York session before backing off slightly. Gold continued to show strength as well as investors rushed to precious metals in the face of growing concern over deteriorating debt problems in the United States and Europe. Gold touched a new record well above $1607 per ounce this morning before taking a slight breather.

While the overall technical pattern in silver looks very favorable for a continuation of the move to the upside, a short term consolidation period can be expected as the market is beginning to look somewhat extended. Relative strength is now moving into overbought territory so perhaps a pullback to test the new support at the breakout point around $39.30 could be in the cards. As long as this new level of support can hold, a rally upward towards the April high near $50 per ounce appears likely.

The metals may get a bit of a boost from institutional buyers as banks and larger funds move in to take advantage of artificially suppressed pricing resulting from the forced liquidation of leveraged U.S. retail trading accounts ahead of the Dodd-Frank legislation that took effect on Friday at the close. In addition, many of the traders and investors forced out of leveraged accounts may resume buying through alternative investment vehicles such as bullion, exchange traded funds, and mining stocks. Any activity of this kind could keep bids elevated as traders look to maintain long positions in a trend that appears to be gaining momentum.

Those who are looking to take a new position may want to consider the area between $39.30 and $39.50 as an attractive entry point. A trade at this level with a protective stop placed just below the May 25th high around $38.86 would provide a limited amount of risk with a very favorable reward ratio if the market rallies off recent support and eventually moves higher to test the $50 level. The trend in gold and silver prices remains bullish with both metals currently sitting well above the major moving averages. Remember that a reversion to the mean will occur at some point so it is never a good strategy to chase a commodity when it is extended. Wait for a pullback, and always use your stops to give any trade the best possible chance for success.