01 July 2013

Interesting relationships being hit in the long term gold chart

This candlestick chart shows the weekly gold price performance since the 1999 bear market low, to the all time nominal high. Against this price action I have added a Fibonacci fan with 38.2%, 50% and 61.8% gradients of the entire move's range. I find it picks up several important price points and market events and thus suggests to me we are close to some exhaustion in the current down leg in price.

UPDATE 9th July 2013

Overshoot following the NFP inspired USD rally could not gain the momentum to leave this support area in the spot gold market (see chart). The price should be attracted back to the USD$1250 region if this long term relationship has any real influence. In addition there is some strong divergence observed in the daily chart - giving support to the idea that this price region will act somewhat of a trend slowing or reversing region.

UPDATE 10th July 2013

Short covering in gold is throwing up some extraordinary events in the paper gold market with gold going into backwardation for only the 3rd time in 20 years (the other 2 occasions at the low in 1999 and the other time when it collapsed due to liquidation in the GFC of 2008).
The risk is that there are severe shortages in the spot market at the current price level.

UPDATE 11th July 2013
Gold seems to have bounced off the long term Fibo fan line and on its way to USD$1450 over the next few weeks. Before that there are several hurdles - not the least of which is the resistance at USD$1300 (see charts)/

UPDATE 13 July 2013
The short term price action in gold is constructive for a break above USD$1300, but not necessarily imminently. The longer the price stays in the range USD$1270 to USD$1300 the better the prospects for an eventual break to the upside, as it signals market acceptance of price and steadily reverses the downward momentum of the yellow metal. Apart from some nascent bullish fundamentals underpinning price (rising lease costs, backwardation in gold forward prices and the disproportionate response from the markets to the floating of the idea of a reduction in QE by the Fed requiring a clear back peddling by Bernanke during the week) the technical setup is supportive of short covering so long as the price is contained in the above mentioned range. It is supportive because the price action looks corrective since the first attempt at USD$1300 and impulsive rejection of this up move is not, as yet, evident. This leads me to suspect that a breach of, say USD$1305, could lead to a very rapid move higher and a scramble of short covering. On that basis I am buying this market on a break of USD$1305 with a stop below USD$1285, looking for USD$1400+ Having said that, I am aware of Curtis Arnold's PPS trading rules which would suggest that a break of USD$1290 would signal a very rapid move higher (as it would invalidate a potential short term head and shoulders set up, by trading above the right shoulder) However I do not think there is sufficient evidence of a H&S in this market. For one a H&S pattern signals an end of an up trend and there is no up trend in this market as yet!

Gold has now clearly broken the USD$1300 resistance - albeit with more gusto than I was hoping as my stop entry was not very close to the breakout level. There will be many and numerous reasons and narratives to explain why, but the fact is it has and that now clearly puts the bulls back in the picture with targets between USD$1400 to 1450, the area from which the price broke down to print the recent lows. (See chart)

Interim resistance is to be found at USD$1325, but above there a very rapid move to USD$1400 can be argued technically.

Definitely a buy dips market, very volatile price action is anticipated as market integrity could well be tested.

After overshooting the USD$1325 resistance by $15 to $20, the market has now returned beneath this level and may have a go at filling the gap back towards the USD$1300 level. I view this pullback as a buying opportunity and have orders in the market to re-establish longs in the USD$1310 to USD$1315 area - stops are below USD$1290. The short term outlook for the USD overall is corrective in my view as FX markets were displaying divergence on the RSI on most pairs and with a lot of traders long of USD some respite to their recent pain was overdue.

A big week looms for financial markets as the northern hemisphere prepares for its summer break. The technical picture in gold has reached another important juncture. On the one hand, clear, strong resistance looms in the USD$1340 to USD$1350 area that should ward off any near term challenge (see chart below). Against this is the bullish price action showing an upward "p" in nominal price distribution which most uptrends in markets display in their evolution. This leads me to think there will be at least one attempt on resistance this week and depending on how this unfolds, might be an area to book partial profits. Needless to say, should the market not find the resistance that strong, the price implications are extremely positive.

Frustratingly stopped out of longs on dip to USD$1285, which in retrospect was a stop set too high. It seems the market was testing the bulls' resolve and filled the gap. Little opportunity to get back on as the market gapped higher on the weaker than expected NFP data from the US. Technically, the market has shown some underlying strength by quickly rejecting the lows around USD$1285. Bigger picture the lows are getting higher as are the highs and that is constructive for further gains. Any dips towards the USD$1300 will be bought in my opinion and thus is my strategy.

UPDATE 13 AUG 2013
The gold price revisited the USD$1300 (and then some!) but has found a bid, interestingly at the long term trendline support that I originally noticed (updated with the passage of time). The gold price is now back at tough resistance in the USD$1340 to USD$1350 region and will find plenty of selling from spec accounts and traders taking profits. For me it is an area to take at least partial profits on the longs from $1300 area. Bigger picture I am mindful of the dynamics over the last couple of years and the suspicion that the long term Fibo fan may only provide a pause to the downtrend, rather than a major bottom. However, there are bullish developments in the fundamentals of the physical market and sufficient concern about the creditworthiness of big banks to warrant continuing a 10% to 20% allocation to my portfolio as insurance - an allocation few have in the investment universe. Needless to say if even 10% of investment portfolios wanted to hold 10% of their value in gold, its price would be significantly higher. If the gold price were to fall beneath that long term trend line, a significant fall to USD$1,000 would be the target.

The chart below shows the weekly close chart of the gold price since the beginning of the bull run with Fibonacci fans to the all time nominal high. The MACD has crossed and is commencing an ascent and is the one bullish technical factor I have identified at this timeframe. The green dotted lines show the Fibonacci retracements from the all time high to the recent low and clearly displays one of the cluster of factors contributing to the resistance - the 23.6% retracement.

The second chart displays a HLC chart with the same annotations and studies on a daily basis. It provides a bit more detail but doesn't really change the view that there is solid resistance above the market short term.
UPDATE 16th August 2013
The USD$1340 to USD$1350 resistance broke on the 4th attempt and now the scene is set for a retest of the next resistance level in the USD$1420 to USD$1430 region based on the area where there was consolidation and a trading range back in May to June this year (see charts). However the major resistance to my eye is in the USD$1460 to USD$1480, where the 38.2% retracement of the entire correction from the nominal high to the correction low is found. Interestingly it is also where the next Fibo fan line (from the beginning of the bull market low to the all time nominal high) is approximately located for the next month or so. This area should present considerable resistance but depending on how quickly we get there, could also signal a return to widespread retail interest again in precious metals.

Update 26th August 2013

Nothing really to add other than to restate that there will be some stalling and range trading once the market gets to USD$1425. However, I do not expect it to slow the market for long, or turn the trend for higher prices. That may occur at the next hurdle around USD$1475. Some caution is warranted of a steadily rising RSI but it is not signalling an overbought market on the dailies at this stage and the MACD is long and trending higher too. The wave structure is showing some maturing underlying bullish structure and may signal some selling could emerge around the USD$1440. The move off the USD$1180 low to the USD$1350 level was USD$167.62 in size. Adding this to the recent low at USD$1272 targets that level which is roughly in between the USD$1425 consolidation range and the longer term Fibonacci resistance at USD$1475. Bottom line is the market is still in short term bull move with little in the way of resistance for another USD$15 to USD$20.

UPDATE 28 August 2013
Frenzied buying and stop loss activity have sent the gold price to the first area targeted to provide some resistance and has prompted me to sell all speculative leveraged gold positions. I expect the market to pull back towards USD$1400 and trade the range for the next week or so before making an assault on the USD$1475 level over the next month or three. I will post a chart later but am off to play golf now!

UPDATE 29th August 2013
Having spent a bit more time looking at the close chart on gold, I am now coming to the view we may actually see a larger pullback in price than originally thought. The charts below show the considerable difference between the OHLC and simple close chart on daily gold. The OHLC chart targets USD$1440 for equality of the first and third legs in the recent 3 wave upmove in the gold price, which has not been reached yet. However the close chart has been met to the penny. Given the recent moves in the gold market, I now believe we will see a deeper correction and maybe even a move back to new lows. Hence care is recommended - especially if the support region in the daily OHLC chart is breached.

UPDATE 6th September 2013
As it turns out the resistance at USD$1420 was more significant than first thought and my late change of heart has proven beneficial. The price action is not conclusive which is surprising as I thought with market testing support here (USD$1370), we would have an inkling as to whether price was correcting the new uptrend or returning to downtrend. However under most scenarios, there should be a tradeable bounce off support around USD$1355 to USD$1365 support level - possibly for a resumption of higher prices. It is possible that the levels right now ($1365) are the low, however, I would prefer to buy on a dip below $1360 to improve the risk reward (as the stop loss is down below $1343). If set, profit target would be $1400.

UPDATE 26 NOV 2013 - Who says no one rings a bell at market turning points?
Last night Sydney time I noticed a tweet from Stephen (@TheKouk) Koukoulous gleefully declaring that gold was rubbish and "Shiny dirt (aka gold) US$1,228..." and I thought to myself it was a nice contrarian indicator.

Overnight, gold promptly put in a key reversal on the charts and has rallied back to the breakdown point from the long term trend line support that first caught my attention back in June. It seemed all of a sudden that a tradable bounce, at least, is on in the barbarous relic. A weekly close below that trend line support would be a big negative to my outlook, but with sentiment very negative and downward momentum near exhaustion, I suspect we will not get that close (at least this week).

I believe we may be at the equivalent point in the gold market as we were in 1976 (the last time the world reflated itself out of an unsustainable debt situation) and if price action is repeated, USD$5000 is possible in the years ahead. However whereas in the past global debt was a fraction of global GDP, now we have debt many multiples of global GDP and thus significantly different real returns may be at hand as massive wealth transfer could occur in either a bond market implosion or widespread sovereign default.

On that basis, I have bought into this sell off at 1250 with a stop below 1228.

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