The Philadelphia Gold/Silver Index (XAU) Suggests More Downside Likely

By Jim Donnelly, Olson Global Markets

Along with likelihood that the U.S. Dollar Index (DXY) has more room to move on the upside, it also appears that the converse of that thought is likely as well. Namely, that the Philadelphia Gold/Silver Sector Index (XAU) has more downside ahead of it.

After hitting a high of 198.32 on December 2, 2009, which tested key “channel top” resistance, the XAU reversed direction and later sliced below “mid-channel” support at 164.10 on January 21, 2010. With long-term (monthly) stochastic studies still falling bearishly at this time, the prospect for a test of key “channel bottom” support at the 138 level appears probable over the next couple of months. Moreover, by the time such a test occurs, monthly stochastic studies will likely be in an oversold condition. If that proves to be the case, the decline in precious metal prices may end for the intermediate-term.

Nevertheless, a decline to the 138 area would represent an additional erosion of nearly 10% from Friday’s 153.42 close in the XAU. In addition, it would represent roughly a 30% decline from January’s 164.10 peak.

In any event, such a scenario would favor the expectation for a further rise in the value of the greenback as well as additional declines in both the S&P 500 Index and the Dow Jones Industrial Average.

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