Reversal

A reversal is a change in the direction in which an asset is going. Reversals can be extremely important for gold and silver investors and traders s they might signify a change in the current trend. At the same time, the analysis of reversals is not limited to price itself. The reversals can take the form of a shooting star candlestick, but there are also other ways in which the price can reverse. Most of them, however, are confirmed by high volume readings.

Reversal in Gold

Gold, no different than any other asset in the financial markets, is also subject to reversals. In particular, trends can be ended by powerful reversals. Quite importantly, strong price swings in the opposite direction might turn out to be reversals. But, as noted above, it is not only the price that is important when analyzing a potential reversal. Another factor is the volume.

While reversals can and sometimes occur on low volume, it is the high volume moves in the opposite direction that have the potential of becoming significant long-term tops or bottoms. Let’s take a look at the example below.

This chart shows the price of gold throughout the years, since late 2008. If we take a look at the areas marked with blue ellipses, we can notice an interesting pattern. First of all, in the period 2009-2011 gold went up almost in a straight line, or at least as much as an asset can go in a straight line. A firm bullish trend was well established. However, from the monthly point of view, August and September (higher blue ellipse), are crucial. August is a month when gold hits news highs and does so on extreme volume. September is a very sharp downswing, also confirmed by extreme move.

We have two back-to-back months forming a reversal and both of them are months of extreme volume. These are the hallmarks of an important reversal. As it turned out, this reversal was actually the 2011 top and the end of a several-year-long bull market in gold. So, the 2011 reversal was not something a gold investor would want to miss.

Of course, there is no way of knowing with 100% certainty exactly when the reversal occurs until it actually occurs. But, if one pays attention to many factors that are in play for a given market along with factors that are developing in the related markets, one can see signs of a reversal even before it happens. Many technical, cyclical, fractal etc. tools are designed precisely to make it easier to detect the upcoming reversals.

Reversal in Silver

Reversals in silver operate the way reversals in gold do but they can also tell us something about the precious metals market beyond what is said by the reversals in gold alone. Again, our focus will be 2011 and the monthly chart, only this time we take a look at the white metal.

So, this is a mere repeat of what we have already seen on the gold chart, right? Not really. While the shape of the chart is similar, owing to the persistent long-term correlation between gold and silver, and the reversal is confirmed by extreme volume, the timing is different. Namely, the reversal for silver, in monthly terms, took place over April and May 2011 rather than August and September as was the case for the yellow metal. This means that silver not only ended its long-term bull market on this reversal but also it had already given a strong signal to precious metals investors even before the top in gold was formed.

Reversal in Mining Stocks

The discussion of reversals in the precious metals market would not be complete without mining stocks. For the mining stocks example, we break away from 2011 and the top in the PMs market. Instead, we focus on the late 2008 reversal in gold stocks.

The late 2008 is slightly different than the previously-discussed ones. It highlights the fact that there are also other important factors than price and volume themselves. The late-2008 slump was most likely caused by forced liquidation in the market when everybody and their brother scrambled to get out of the market and into cash. For precious metals analysts this move down was anomalous in that it was likely caused by external factors and not by inherent weakness in the precious metals market. A reversal within such a decline could be a sign of the tide in the market turning. And it was such a sign back in 2008. This reversal marked the end of declines and the beginning of the move up which did not end until 2011.