Gold: The “Hook” is Set

This article is a follow-up to the article I wrote for Green Faucet on September 26, 2011 – Gold: The Correction is Only Beginning.

For many months, Gold had been in a relentless advance, cresting at $1923 an ounce. Then, suddenly, in early September, precious metals went into in free-fall, with gold making an intraday low of $1530; having lost 20% in about three weeks.

Certainly, gold had been, technically, quite overbought, with investors and sovereigns pouring into the metal as an alternative currency. However, as the European Union seemed to be unraveling, and deflationary forces took hold, investors feared gold would be liquidated to raise cash. That brought the steep selloff as traders poured onto the short-side.

At that time I included a weekly chart of gold, with a projection of a coming rebound. I’m reprinting that here so you can see what I had expected.

 

 

Charts Courtesy of TD Ameritrade

What I showed then was that I had expected gold to move upward for a few weeks, into the 1710 to 1740 zone; and that “odds of a rally holding up were very small.”

Now look at the same chart, below, which includes the trading since that time. You can see that the upside correction followed very closely to the predicted rebound. Also, you can see the cyclical patterns, highlighted by the vertical green bars, and in the past cycles, the clear ABC corrections. The current advance in gold is completing upside corrective wave B, to be followed by downside resumption C; which will make the cycle low. The low is due in 4 to 7 weeks. With these patterns so consistence, it means gold will likely move down to the target zone between 1473 and 1530 by late this year.

 

 

The next chart is of GLD, the gold ETF. I use the daily charts of GLD because it does not include overnight trading; thus showing gaps in the chart more clearly. What I am illustrating here is that candle patterns work very affectively in GLD. You can see the “Island Top” which started the big decline and the “Abandoned Baby”, which started the recent rebound.

The past few days has seen a burst upward, with the last day being a small day – within the body of the previous day. This little “inside day” is called a “Harami”, Japanese for “baby”; a body within a body. Note also that it happened just as GLD is approaching the resistance zone. This is a signal that the current rebound is reaching a level that will bring back the sellers. As an aside; you can see from these charts why technical analysis is considered an “art form” vs. a science.

 

 

Traders in Gold have gotten bullish as they have watched stocks soar, and oil, copper and other commodities rebound. And it is possible, for a while, that the Euro situation will settle down and commodity markets will continue to move from fear of stagnation to hopes of economic growth. None of that, however, restores investors need to hold gold as an alternative to fear, as they have done the past couple years.

Gold could hold up for a couple more weeks, chopping its way further into the resistance above $1740. However, the risks now heavily favor the downside. With a possible advance of another $30 an ounce compared to a probable drop of $200 an ounce…  Well you can do the math.

Late notes:  As I’m readying this article for submission at 4:00am Monday morning, gold is already pulling back sharply. I hate when they do that! Investors are realizing that the EU’s plan is more a plan for a plan. And the focus is moving to Italy from Greece as yields on Italian bonds are moving upward again. I see this pullback in gold as a confirmation of the aforementioned resistance zone and the coming down leg in all precious metals. 

Full disclosure. I’ve started building into a bearish position in GLD, selling an “Iron Condor” with a bearish skew. It’s not very aggressive, yet, and, in fact, not the perfect position for the sizable decline I see coming in gold. I will be increasing my bearish bias in GLD positions over the next several days, each time gold tries to move upward.