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Gold - More Cycles, Fractals, and Updated Targets
As we wrote about last week, gold appears to have put in place a short-to-intermediate term top. For some detailed references in this post, please make sure you understand how to read the cycle charts.
Though last Friday wasn't THE top in the gold market, it did occur over the late session between Monday and Tuesday. As we mentioned before, the chances of a top were good, as noted by bearish divergences and the beginning of the down cycle period. There was a risk of a breakout when the gold price broke over the old highs, but it was negated as the price quickly came down. We are, once again, at an interesting point.
The chart below is the updated GLD ETF cycle chart, used so we can analyze market volume quickly. Note the circled "H" that occurred last Thursday, which was a warning of an impending top. We noted that the top would likely be within 1-2 days of this marker, and the top did occur between Monday and Tuesday in overnight trading. Today the price bounced off of the instantaneous trendline. We will need to see a solid day or two below today's lows to confirm that the trending state is over, and a reasonable pullback in the gold price is underway. That is, we must see the price fall below the instantaneous trendline until we get an "end of trend" sell signal. Presently, we do not have this, but another day like today will satisfy this condition.
Note that the down cycle, if this is to be a short term cycle, is already roughly 1/4 of the way through.
While the head and shoulders pattern we discussed is technically out of the picture, the chance of a double top (which is essentially the same issue at hand) is present. We're still watching the 1360ish range as a neckline that would indicate a much strong downward move in the mix. Most of the technicals discussed last week still apply. We encourage you to review those two posts.
This week, we add a new element into the mix--the fractal turn signal. Below is the GLD ETF chart with a fractal indicator at the bottom instead of the cycle indicator. We keep the cyclical supportive and resistive lines on the chart as references (remember, they act as "magnets" for the price)
By using a combination of cycles data, fractals, and traditional technical analysis--which all use very different techniques--a higher probability of a correct diagnosis of a turn is possible.
One of the more difficult challenges with cycles work is correctly interpreting which cycle is dominant at a given time. Here is a 3 year GLD weekly cycle chart.
Note that the only time that the price has fallen below the instantaneous trendline ("IT") was in 2008. In fact, with the exception of that period which was the strongest pullback in gold price in percentage terms during the entire bull market, the price has simple bounced off of the IT during a correction.
The IT is currently around 1285. The 150 dma is at 1270. The 150 wma is at 1032. Key fibonacci retracements are at 1327, 1295, and 1263, respectively. There is obvious support between 1250 and 1265. The dollar is still in a weekly uptrend and daily downtrend, but not likely to rise much higher. Thus, we believe that the best case for a gold price pullback is in the 1270 - 1285 range. This is a change from our previous forecast of 1250, largely because the price has stayed higher than expected which have forced the trendlines to stay higher.
For the time being, silver is outperforming gold, but as the ratio is now down from 70ish to 50ish, the intermediate term outperformance is likely ending. Our target is the 47ish level. Note that the gold/silver ratio has not dropped below 46.74 since this bull market has begun. Unless we're near the end of the market, gold is likely to begin to outperform. We're taking profits on SLW, which has more than doubled in the last year.
The gold miners have broken out and are outperforming. We expect this trend to continue as long as oil stays below $100--likely for another quarter or two. Read more...
