Gold and silver are having another banner day to end July. Today will see very important closes for them to end July.
In technical analysis closing prices matter.
New highs and lows make headlines, but closing prices tell you were people are ultimately willing to be at the end of a particular period of time. The bigger the time period, the more significant the price move.
For gold and silver July 2020 was an important month. Not because gold made a new all-time high or that silver broke out of a seven-year base — those things are great — but because they both closed strong after what were immense moves.
One of the important things about technical analysis is that time is the most important arbiter of whether price moves are significant. Getting a big move up in gold, for example, in the hour after the Fed announces some new version of QE is interesting to day traders.
But if that move can’t be sustained through time then it is ultimately irrelevant and serves as nothing more than an opportunity to keep gold down later.
That big move only acquires significance as it closes at that new higher price in longer and longer time frames.
So if gold pops for a couple of hours but can’t close the day above a previous resistance level — like a previous high — then that move has almost zero meaning.
But, if it does close the day above that level, that signals to those on the sidelines that there is more demand for gold than they thought and some of them may pile in the next day.
With each time barrier passed the stock, metal, bond or currency acquires a new set of traders/investors who are only interested in those longer time periods.
So, the hour charts attract one segment of the market. The daily charts another and so on and so on until we get to the strategic investor who doesn’t even think of looking at a chart shorter than a monthly one.
Once that close is achieved, those who were short now have to decide to cover and go long adding fuel to the fire. Highs and lows are important because they help to mark the beginnings and ends of trends but it is closing above them that cements those trends and forces new decisions of traders.
So, for gold and silver all through July I was more than happy with the price action because at every turn, big daily moves turned into strong weekly closes which set up the next week’s trading for a potential bonanza today.
In the case of silver the weekly chart held all the signals you could ever ask for.
The July 5th close at $18.69 (cash basis) set the table as the highest weekly closing price since last summer. It held above recent highs in the $18.50’s. The next week, ending July 12th, saw silver break through $19.00 and hold it, closing above all the highs going back to 2019.
I identified this breakout for my Patrons in my bi-weekly video Market Reports published Wednesdays and Sundays.
And that set the table for the huge move we saw last week and the follow through this week to above $26.00. Moves like this are historic and if either of the closes on July 5th or 12th had been lower, if silver hadn’t rallied on the Friday of those weeks, we wouldn’t be talking about silver holding the $24 level this week.
We’d more likely be talking about whether closing above the 2016 high at $21.13 was achievable for August. Now we’re looking at that level as a potential re-test level for this month’s breakout.
And that all depends on how today closes.
Since silver was lagging gold terribly I’m not surprised by the violence of the up move once it cleared the cap between $18.00 and $18.50. The longer something is held down against its wishes or the bigger the base it builds, the more powerful the move higher.
And with a move this big now the only danger for silver is a weak close which sets it up for an August open with a huge distance to travel to make a new high.
Notice the huge high tail on this week’s candle for silver (chart above). That’s somewhat bearish. Silver got ahead of itself and backed off a couple of dollars. The bigger that tail the more bearish this bar. So a weak close today is your signal of weakness in early August.
To reiterate, just because we see strong action on the weekly chart doesn’t necessarily mean it is significant on the monthly, quarterly or annual chart.
But a quick look at the monthly chart shows just how significant this breakout is. Moreover, for July silver will close within the upper third of a bar whose range is more than five times the normal monthly range (Average range = $18.10, n=84).
That $2 high tail for July doesn’t look so scary anymore does it?
For gold July was also a great month because it grabbed the headline that it made a new all-time high. And new highs are good, closing above old ones is even better.
So, gold pushing to touch $2000 in the futures market made headlines, but closing the month around $1970 is even more impressive. This is no ‘blow off top’ in gold. If it had closed below the all-time high then I would be thinking that.
This is the beginning of the next phase of the gold bull market, even if there will be some volatility, pullbacks, etc.
The longer gold stays above the 2011 high, the more comfortable everyone gets with that price and the monthly close only reinforces that perception.
Closing within $15-20 of the high puts gold in a great position to attack this month’s high in August. As I talked about last week, setting your odds of a move higher or lower is based on previous behavior.
For gold, here are the statistics given a close today at $1975 (cash basis) against a high of $1983.01 and a low of $1757.71.
|Difference Between Closes||$71.15|
|Range:Low to High||$153.71|
|Probability of Breaking July High||88.9%|
|Probability of Breaking July Low||1.2%|
So, like last week, gold closing close to its high for the week sets up a very high probability of breaking the high and trending higher. The pot odds on that (dividing High Break Prob. by Low Break Prob.) happening are 74:1 in favor.
I like those odds.
So, anyone calling for a top in gold here is simply making an guess. If the close today was closer to $1920 I would agree with that call.
Because these numbers don’t lie. They are based directly on what gold, in specific has done, over the previous seven years (N=84 months) without interpretation, regression or hedonic adjustment.
This is a strong final trading day for gold and it should carry into next week and possibly beyond.
We all get blinded by price when it is the combination of price and time that determines where and how far markets are likely to travel.
It’s why after years of searching I found just looking at the relationship between bars, assessing their strength or weakness in that time frame and looking for significance through time is far more successful than tying myself in knots looking at moving averages, drawing trend channels or dusting off my very rusty differential equation skills.
Simplicity speaks. Looking at bars is hard enough, letting them tell you their story through time is even harder. Looking for further confirmation through the dubious application of more math only creates what we board gamers call analysis paralysis.
Gold and silver had a great July which is the beginning of Q3. All I’m focused on now is how they trade in August and September to tell me if July’s price action will propagate out to create a strong quarterly close, confirming this month’s price action.
So far so good. Great really. But there’s still plenty of time for things to change.
P.S. Since my relationship with Money and Markets ended abruptly a few weeks ago, the article I used to write for them on Fridays I will put here on Gold Goats ‘n Guns under the heading of Market Friday.
Their loss is your gain, I guess.
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