A time for cautious optimism

The past week has been one of the most volatile in recent memory, but after the dust has settled, it seems that gold, silver and precious-metals stocks have shown more resilience than the stock market as a whole. Some of the short-term charts below look healthy, while some longer-term charts are looking overbought. Caution and optimism may both be called for, depending on one's risk tolerance and time horizon.

During Tuesday's across-the-board selloff, gold found support near the November high of $848, bouncing dramatically from its intraday low of $849.50 to close within the blue channel from August and up for the day. On Wednesday gold found support at the bottom rail of the blue channel, and on Thursday it closed at the top of the green channel from November. On Friday, it broke through and closed just above the top of the green channel. The top of the blue channel, currently a little above $930, beckons, although Friday's longish uptail is potentially a sign of weakness.

RSI has just re-entered its overbought zone, but MACD is in the process of making a bullish crossover -- although at high levels, so the potential for significant gains in the near future may be limited.

On the long-term chart, gold is fast approaching the top of the channel from mid-2005. The target again lies currently a little above $930. RSI remains in overbought territory, having just bounced up from around 70, but is making a bearish divergence as it is at a lower level than its peak at gold's November high. MACD is in nosebleed territory, having exceeded its level at gold's May 2006 high, but the MACD histogram is also making a bearish divergence.

Silver bounced from an intraday low of $15.26, comfortably above its 50-day MA at around $15, to close on Tuesday at its green uptrend line. That support gave way on Wednesday, but silver worked its way upward on Thursday and closed on Friday above the green line and at resistance offered by the bottom rail of the blue channel from August. Silver opened and closed at $16.49 on Friday, making a true doji, a candlestick that signifies a standoff between bulls and bears and indicates exhaustion after a strong advance.

RSI is close to overbought, and MACD has flattened out at a high level. Silver is looking toppy. If it re-enters the blue channel, it may have a little room to rise before reaching its projected Fibonacci target just under $17. Otherwise there is some support at $15.26 and then at the 50-day MA, currently at $15.02.

On the long-term chart, silver is looking reasonably healthy, having bounced off support near the uptrend line from August 2005. Although RSI is not yet in the overbought zone, it is at levels that have preceded sharp pullbacks in the past 15 months, so some caution is warranted. While MACD is rising, the MACD histogram could be making a bearish divergence.

GDX gapped down sharply on Tuesday but bounced near support at the Fibonacci 38.2% retracement level around $45 and closed up for the day. The gold-mining ETF managed to close above support at the Fibonacci 23.6% level around $48 on Wednesday. It rose sharply on Thursday but made a marginal gain of 0.14% on Friday, closing at $50.42, up seven cents. Friday's candlestick had a longish uptail, a sign of potential weakness.

RSI has bounced from 50, but MACD, while flattening out, looks as though it has room to fall. GDX may trade in a range for a while. Resistance is likely at the recent high of $54.23, and support may be found at the Fibonacci levels mentioned.

On the long-term chart, GDX seems to have made another successful test of the top of the blue channel from which it broke out in August. RSI and MACD are showing signs of a bearish divergence, however. Volume, which picked up in late July, has surged with the volatility since the beginning of the year. The high volume needs to be accompanied by further price rises if it is not to be seen as a sign of distribution of the stock.

The GDX:$GOLD ratio gapped sharply down on Tuesday, tested the top of the broken falling wedge, then bounced just as sharply higher. On Friday, however, it closed below Tuesday's close, having encountered resistance at its falling 50-day MA, which is below the essentially flat 200-day MA. The long uptail on Friday's candlestick shows potential weakness in the ratio.

RSI seems stuck below 50, and MACD is below zero and falling. It looks as though the gold miners will continue to underperform the metal itself for the time being.

The gold-mining ETF is looking pretty solid relative to stocks in the broader market, however, as shown in the bottom panel of the chart.

The GDX:$SPX ratio broke out sharply from an eight-week flag at the beginning of this year and seems to have broken out of a two-week flag on Friday. The long uptail on Friday's candlestick is a sign of potential weakness, however, and there is a risk that the ratio will form a double top instead.

RSI appears to be making a bearish divergence, and MACD is flattening out at a high level. It's possible that further upside in the ratio may be limited in the near future.

The steady rise in average relative volume since August, seen on the long-term chart, may indicate gold-mining stocks have begun to be perceived as a safe haven from the even more volatile broader stock market. RSI is at the boundary of the overbought zone, however, and MACD is at extreme levels, with the MACD histogram threatening to make a bearish divergence. Some reversion to the mean of historical relative performance may not be too far off in the future.

On Tuesday the U.S. dollar index hit an intraday high of 77.35, a little below the thick blue trend line, and closed just above its 50-day MA at around 76.20. That support failed on Thursday. The index rose on Friday together with gold, a fairly uncommon occurrence.

RSI remains mired below 50, but MACD is flattening out below zero.

The U.S. dollar may be forming a symmetrical triangle, in which case the index may be expected to fall to the thin blue line forming the triangle's lower edge, currently around 75.4, and bounce from there. Next support would be at the recent low of 75.2. Final support is at the all-time low of 74.48. The thick blue line may be expected to offer ongoing resistance.

A glance at the long-term chart lays to rest the notion that the rise of gold is solely a function of the decline of the U.S. dollar.

RSI has begun to turn down, but MACD is still rising, although the MACD histogram has flattened out.

The dollar could rally to its falling 50-week MA, currently just under 80 -- where the index would run into resistance at the top of the broken falling wedge as well -- without breaking its secular downtrend.