During my time trading on Wall Street, I learned many valuable lessons. I always try to share as many of these as I can. But right now, one lesson sticks out above the rest…
Always have a plan.
As I often stress, the market doesn’t care what any of us think. It’s going to do what it’s going to do. All we can do is react.
Therefore, you have to make sure you know what you’re going to do as a trader. This is why it’s so important to follow your stop losses and use risk-management principles, too.
Right now, stocks are entering a bear market. It’s an ugly reality… whether some people want to admit it or not.
This environment is likely to last the rest of 2022, if not into 2023.
In times like these, a lot of folks turn to precious metals. But in reality, that’s not a good plan right now. Today, I want to cover the facts based on the current setup… and show you what’s going on in this traditional safe haven.
Let’s get started…
Despite record inflation and rising geopolitical tensions, precious metals are struggling. This is mainly due to the U.S. dollar…
The dollar and precious metals tend to move inversely. That’s because metals like gold are priced in dollars. When the dollar is rising in value, you can buy less gold with your money. So demand for gold typically weakens, pushing prices lower.
This is a weekly chart of the U.S. dollar. As you can see, the rally of late is strong…
The relative strength index (“RSI”) at the bottom of the chart is in overbought territory today. That’s a sign that bullish sentiment has gone too far… So you might think the dollar is going to top out soon. Well, maybe…
Look to the left side of the chart. I note where this same phenomenon occurred back in 2014 and 2015. The dollar rallied sharply, but the RSI remained in overbought conditions for some time.
This is why I often say that you can’t rely on just one indicator or method. You have to look at several different factors to get the full picture. Now, as the chart above shows, the dollar did just make a new high. Perhaps we’ll see a pullback in the short term.
But to get a sense of what’s likely to happen, we have to look at the respective technical setups in gold and silver. Here’s gold…
Gold topped out in March this year after the initial surge when Russia invaded Ukraine. Since then, the metal has been in a short-term downtrend.
Now for the good news… Gold is still in a long-term uptrend. The black dashed lines are acting as support, and the metal just bounced off the first one last week.
So in the short term, it’s certainly possible that we’ll get a rally. But I don’t see any extreme reading on the RSI at the bottom… And to be honest, I’ll only start to get very bullish with a break above the “double top” labeled on the chart (a significant resistance level now) above $2,000.
Here’s what silver is doing…
It’s simple stuff here. Silver is still in a long-term uptrend, but you can see that it broke below support last week. Therefore, that $22 support level will now act as new resistance on a rally, making it tough for the price to rise.
There’s also significant resistance above that, with the downtrend in place since the high back in early 2021. So at best, silver can chop around in between this support level and the resistance levels.
At worst, silver will continue to decline. It’s just a difficult call right now with the dollar so strong. And it’s not worth a trade in any direction, in my opinion.
So what should your plan be for precious metals today? Do nothing…
For now, I’m not interested in trading the precious metals sector – my focus today is on stocks. As I noted above, we’ll likely see ugly price action in stocks in the months ahead… And that means there will be lots of trading opportunities to take advantage of it.
Good trading,
— Greg Diamond, CMT
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Source: Daily Wealth