Central banks revive gold bulls, but silver could shine more

By George Albert

The Nifty zoomed from the bullish zone identified in last week’s column and has more steam to rally after a possible correction. The central banks of Europe and the US, on the other hand, have woken up gold and silver bulls with their currency debasement policies.

Let us look at the Nifty chart **( see Nifty Chart )**first to draw some lessons from last week and take a peek at the future. Please note that the levels marked on the chart are from last week and we have not changed it so that we can show how the strategy worked out.

In last week’s article, we had predicted that the Nifty would bounce as it had reached a bullish zone. However, since the bullish zone was wide (from 5,210 to 5,258), we had suggested that traders use the commodity channel index (CCI) indicator to take a position. The CCI then was below a negative 100 and we stated that if the indicator closed above negative 100 and the Nifty was still in the bullish zone it would be time to go long.

That’s exactly what happened. On Thursday, the CCI closed at negative 96.15 and the Nifty closed in the bullish zone at 5,238. The right time to go long was on Thursday, a few minutes before the markets closed. Traders with automated trading systems could have programmed an entry based on the CCI and price factors. On Friday, the market zoomed and hit the first profit target identified in last week’s column and is shown by the red lines on the chart.

Remember, we had said last week that when going long the resistance levels above current price should be the profit target. Resistance levels are areas where the supply of an asset far exceeds demand, which usually leads to a fall in price. Hence it’s best to sell and take profit at the resistance level or a little earlier.

Hopefully, some traders would have taken profits on Friday when the Nifty opened above the profit target. The next step, as we had mentioned, was to move the stop-loss orders once the markets start moving in our favour. The previous stop-loss was below 5,164 and now, with the rally, we’d move the stop-loss on the balance position below Thursday’s low around 5,210.

Given the strength of the rally and the possibility of further easing from the US Federal Reserve, we could see a continuation of the uptrend, if nothing else changes. However, all rallies tend to correct a little bit, before they continue upwards.

Last week we did get a few emails from readers who got nervous when the Nifty continued to slide deeper into the bullish zone. This was before the CCI move above negative 100. Most trading is about psychology and keeping your cool as the markets work their way is important to be profitable and not getting out of the market too early or too late. Once you have decided to take a position and have your stop-loss and profit targets, let the markets take it’s course.

Finally, before we switch to gold and silver, let me pre-empt the skeptics of the Nifty trading strategy. Some will say that the huge rally on Friday had to do with the European Central Bank’s (ECB) decision to buy unlimited amounts of government bonds to stabilise the debt markets. I am sure that’s what the fundamental analysts will say and it’s certainly true.

However, the possibility of easing was talked about for a long time and the day before the announcement the Nifty was deep in the technical demand zone, making it an excellent buy. Also note that the technical indicator CCI had moved above negative 100 a day before the ECB announcement, signalling a buy. Hence it’s safe to conclude that while the ECB announcement turbo-charged the rally, the upswing in the Nifty had already begun.

All this talk from the central banks across the world has woken up the gold bulls who have been steadily pushing up the price of gold. Over the long term, if in fact the central banks, and especially the US Fed, pumps in more money, we could see the price of gold rally. However, for now gold is at resistance and has another resistance zone a little higher. ( see Gold Chart for resistance level ). Prices often fall from resistance.

Remember, for gold to rally the central banks have to print money. The ECB has stated that it will sterilise money pumped into the system and the Operation Twist of the Federal Reserve is money-supply neutral as it is buying long-dated securities by selling short-dated ones.

Most fundamental reasons that apply to gold also work for silver. Technically, silver is near resistance and can sell off a bit. ( Click here for silver chart ). However, if the resistance is broken, silver has a better chance to rallying higher than gold.

George Albert is Editor, www.capturetrends.com