Special Technical Focus on GOLD.
Gold's phenomenal bull charge which has risen over 468% since 1999 is now starting to unwind after being tempered by a “muleta” standoff. Akin to traditional Spanish bullfighting, a “muleta” or small red cape is raised in order to tire the animal‟s charge and offer a beautiful display of “faena”. The yellow metal has been locked in a critical standoff ever since it carved out its all-time record high at $1431 and is currently showing signs of rolling over. Point & Figure charts highlight a price squeeze within a range between $1430 and $1320 (see Figure 1). A break in either direction has the potential to drive a 20% change in the price of gold. The probabilities are now skewed for an extended downside reaction.
The Trend is your friend, until… Nine-consecutive years of higher reaction highs and lows has elevated gold to a unique stardom within technical analysis record books (see Figure 1. chart insert). With such a high caliber breed of bull, it would only be natural to believe that prices continue to run in a straight line. However, veteran market observers know that such accelerated price moves, no matter how robust, inevitably prove to be unsustainable in the short term. The aftermath of gold‟s previous bull cycle, between 1969 and 1980 (which has an 11-year time pattern that coincidentally mirrors the current secular uptrend that launched in 1999 and peaked in late 2010), acts as an extreme, but noteworthy omen to how market‟s can avalanche from mountainous peaks.
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| Figure 1. Point and Figure chart illustrates the primary and secondary trend in gold and its current "muleta" standoff between $1430 and $1320. Chart insert (i). Annual candle chart exhibits nine-consecutive years of higher reaction highs & lows. Chart insert (ii). Gold bull-cycles past and present, mirroring 11-year time patterns. |
A confluence of important exhaustion signals were generated by Tom Demark‟s TD Sequential indicator across monthly, weekly and daily time fractals (Figure 3). The daily chart highlights that TD Sequential generated Red 13 exhaustion sell signals on two different countdowns within the current multi-month distribution pattern (head & shoulders/triangle). A break below $1320 would confirm the reversal pattern and unlock an extended downside slide in gold.
Further bearish evidence can also be seen on the monthly chart which is currently developing a bearish engulfing
candlestick pattern from the all-time record highs, following five consecutive higher reaction highs and lows. A sustained break below $1320 would completes a potential Primary degree impulsive third wave within an Elliott Wave structure. The tendency for cycle alternation favours a sharp corrective fourth wave (opposite to the wave two sideways correction in 2001), which would help develop an important low for 2011. This potentially offers a rare buying opportunity for what is likely to be the most profitable future rise in gold to come.
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| Figure 2. Time Fractals of Monthly, Weekly and Daily charts showing a confluence of exhaustion signals derived from Tom DeMark's TD Sequential indicator. Monthly chart also has Kase Dev stops overlayed for potential levels to take profits or exit potisions |
Conclusion
Gold's primary trend remains intact, but even the strongest of bulls need to stop for a healthy siesta. The “muleta” standoff is likely to leave an important signature on the precious metal‟s roadmap and offer virtuous lessons to investors at large. To profit from gold‟s awe-inspiring rise, we must first learn to respect the nature of its “yin-yang” behavior, just as a “Torero” would respect the beauty and tenacity of a raging bull.
To do this we need to accept the market‟s highly volatile, double-edged, characteristics and enforce disciplined management of risk. Astute trailing stop strategies such as Kase Dev Stops, help protect from sharp trend deviations and can provide short to medium-term profit taking opportunities. Watch for levels at $1240, $1181 and $1111 which are statistically calculated from gold‟s current monthly „true range‟.
Any corrective setbacks are likely to be tentatively cushioned into the $1280-60 confluence zone (primary trend-channel support, 200-day MA, 61.8% Fib retrace) and $1220 (reversal pattern objective), with risk for an overshoot back to the July 2010 lows at $1157. This would be just shy of a 20% correction from the all-time record highs. These moves should provide bulls with adequate re-fuelled energy for another charge onto much higher altitudes. Remember that it will more than likely be gold‟s strongest ascent, as characteristic of the fifth wave structure (the equivalent to Dow‟s primary stage three, irrational exuberance, parabolic “excess”, within a long-term bull market cycle).
Confirmation above $1500-20 (secondary uptrend ceiling), offers moves to $1830 (P&F target), with eventual acceleration to the next psychological glass-ceiling at $2000 and beyond. By this time, further tailwind will likely be offered by significant weakness on the US dollar as its major downtrend resumes and other fiat currencies continue to underperform. Moreover, the weak relative performance of key asset classes and renewed increase in the overall secular uptrend across commodities, driven by rising demand and inelastic supply, will compound ample scope for the “barbaric metal” to stage its “grand finale” bull charge.
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