ChartsEdge's weekly cycle chart for gold is here, indicating weakness for a couple of days before another rally effort. Will gold bugs be rewarded finally, or is there a resistance level that will turn gold back down again?Well, you can turn to the longer term cycles projections from ChartsEdge (available by subscription) or other services such as Tim Wood's excellent Cycles News and Views (also by subscription - for both, see the "other sites of interest" at right side of this page). Without stepping on their toes, so to speak, let's see what our own chart is showing about gold (below).
Recently, gold exhibited a head and shoulders (H&S) pattern on the daily chart, and dropped into the basic target level from that bearish setup (a drop roughly equal to the distance from the top of the "head" to the "neckline"). In doing so, it also broke under the steeper channel trendline, but hit a level that's parallel to the larger uptrend channel trendline (in lighter blue). Furthermore, the H&S pattern was dancing about the 200-day simple moving average (SMA), and had touched up to a downsloping trendline from the two prior swing highs.
If gold does weaken inside the "corner" of converging trendlines that price is facing right now on this chart, and then rally again, it will have several resistance levels to contend with: first, a support/resistance level you can see as a horizontal line on this chart that turns green when price is above it and red when price is below it (as it is now). Second, the 200-day SMA again. Third, the downsloping trendline that I mentioned; and fourth, the upper Bollinger Band. Well, actually, there is a fifth - Fibonacci retrace levels marked by green and blue horizontal lines above the orange downsloping trendline.
Can gold manage all that? Well, anything's possible, and the Slow Stochastics indicator on the special setting (39,1) is testing down to its 50 midline which can be supportive of a move back up again. The standard RSI indicator (at top of the chart) went under its midline but stands just above 50 now, which is also helpful ... and the other Stochastics and StochRSI indicators are consistent with price being oversold and ready to rebound again.
If gold cannot manage to surmount the resistance levels, then I can see the potential of a new Andrews pitchfork pointing downward to Fibonacci extension targets in the 630-640 range ... not exactly what gold bulls are currently bargaining for.
What about fundamentals? There I'd say that analysts are mixed. Some are pointing out that inflation or hyperinflation is just around the corner - but, there's a big issue as to just when that may arrive. Timing is everything. Others are pointing out that the fundamental backdrop is extremely deflationary, and the Fed and other institutions are doing all they can to keep interest rates down. Granted they may (or are likely) to fail in this effort at some point - but again, timing is everything!
I'll take the skeptical side of the argument for now, and let gold tell me whether and when it's ready to vault above those resistance levels. (Similar to the way I'm letting bonds tell me whether or not they are ready to move down, by just observing whether or not bonds move below their critical support levels as I posted here earlier this past week.)
There's another vulnerability that I haven't seen people talking about, but it looks very real to me: So many people have been selling gold, as well as the new gold exchange-traded funds (ETFs), on the basis that this is the "true money" and will protect against inflation and hyperinflation. They point to the idea that paper money is being devalued, which certainly has been true (up until the dollar's impressive rally as equity markets have fallen and gold weakened). But I think they are overlooking the very real distribution that's been occurring due to these gold ETFs. Distribution is a term meaning that large institutional holders are selling - distributing - to small retail holders of securities. This is certainly the case with gold because so many of us have now been able to speculate or invest in gold using these ETFs (such as GLD, DGP and perhaps others).
So although these gold ETFs are backed by the physical commodity, the practical market effect has been to distribute gold into the hands of many retail holders who would not normally be the types to hoard away gold or seriously expect to do business with gold bullion or gold coins. And when the gold price goes down, it's easier for them to sell out of their "paper gold ETF" positions (or even be forced to do so if over-leveraged and margin calls arrive). In fact, what if the gold price spirals upward, what would then happen if serious market dislocations cause these retail holders to demand of the institutions that they exchange these "paper ETFs" for physical gold? would that even be possible?!
From a fundamental gold market perspective, then, I believe that the massive retail distribution that began with widespread availability of these ETFs, and continues if not growing, will actually act as a damper on the ability of gold to seriously outperform other investments as gold bugs would wish.
Just my two cents' worth - so to speak! (copper not being worth as much as gold) ... And for my own personal money's worth, I'll be content to continue posting the charts here as they show us whether and when gold is ready to impress once again.
=============
[Update: I see that the COTS Timer blogspot (cotstimer.blogspot.com), which I discovered recently and has an interesting approach to trading with COT data, is currently bearish equities and bullish gold. So a nod to them (their blogspot post at http://cotstimer.blogspot.com/2009/01/some-volatility-this-week.html) and let's see how it turns out. I'm not familiar with the COT Timer track record over time and this may be an interesting test of their methodology ... especially since I tend to agree with their view on equities right now.]
Posts
No comments:
Post a Comment