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XAU-INTERMEDIATE TERM TECHNICAL ANALYSIS

In our previous "EXTRA" report for the XAU on 3-24-06, we presented three scenario outcomes for the XAU that investors/traders needed to consider and plan for accordingly. Specifically we had said the following:

The XAU ended up rallying up to 171, and then over a seven day period it lost a whopping 20% declining to 134, but it managed to recover 6 points by the end of the day on Friday, finishing the week at 140.04, down 19.37 points.

The decline was so violent and--on the surface--the price action so bearish, many investors/traders understandably began to wonder whether--in the best case scenario--gold stocks reached an important intermediate term top, or whether--in the worst case scenario--the bull market in gold/gold stocks was finished. altogether!

To understand the action of the last few days one needs to put it in the proper "context" by taking into consideration the "price pattern signature" of the XAU since the beginning of the current bull market in gold/gold stocks six years ago.

To do so, please look at the chart below very carefully, and read our comments directly underneath it.

Very clearly, the following observations can be made by examining the price pattern of the bull move:

1. The current bull market started in November of 2000 with the XAU bottoming out at 41. Since then, the bull market has unfolded with price oscillating within a well defined rising channel which is still intact (see thick brown channel).

2. A complete "cycle" is a price oscillation from the bottom of the channel to the top, and back to the bottom. The end of one cycle marks the beginning of another. Notice that we have had three such cycles, two complete ones, and one that is currently unfolding. The first cycle (Cycle#1) started with price rallying from the bottom of the channel at point "SP1" to the top of the channel at point "A," and then back down to the bottom of the channel at point "SP2." The second cycle (CYCLE#2) started with price rallying from the bottom of the channel at point "SP2" to the top of the channel at point "A1," and then back down to the bottom of the channel at point "SP3." The third cycle (CYCLE#3) is currently unfolding. It started with price rallying from the bottom of the channel at point "SP3" to the top of the channel at point "A2," and now it is in the process of completion by coming down to test channel support and start a new cycle.

CYCLE#1: (SP1-A-SP2)    CYCLE#2: (SP2-A1-SP3)    CYCLE#3: (SP3-A2-?)

3. Notice that as the bull market is moving forward the cycles are expanding both in terms of the amount of time that it takes for completion, and in terms of the amount of distance that price has to travel from the bottom to the top, back to the bottom of the channel in order for the cycle to be completed.

It should be noted that "expanding cycles" are a characteristic of growing bull markets.

*Looking at the chart above it appears that we are only 1/3 into Cycle#3, and yet the index has traveled already as many points as it did in the previous cycle.

4. Notice that all three cycles have identical price patterns, which can be described as follows:

a. When the XAU starts a new cycle, it blasts off like a ballistic missile straight up from the bottom of its rising channel to the top (see rally#1 identified by points SP1-A, rally #2 identified by points SP2-A1, and rally #3 identified by points SP3-A2.

b.  Each cycle contains 3 declining tops, resulting in the creation of a resistance line. Notice  the two identical resistance lines present in both previous cycles shown in bright green. Notice the three declining tops in CYCLE#1at points A, B, and C, and in CYCLE#2 at points A1, B1,  and C1. Breaking above resistance at the declining top line is the signal that a new cycle has started and the XAU is on its way to a new high at the top of the channel. That is the time for conservative investors to mortgage the house and buy gold stocks.

c. Each cycle is characterized by an identical sharp decline which takes place almost immediately after the XAU reaches the top of the channel. The decline takes price back down  to test support at the break-out point, which in the previous cycle also represented a Fib. retracement level of .618 See point D.

CONCLUSION

The XAU has been moving upwards within a well defined rising channel for the last six years. Currently it is 1/3 into its regular cycle during which it rallies from channel support up to channel resistance, and then it retreats back down to channel support. So far, the price pattern is identical to the one that has been the "signature" pattern of the bull market of the last six years. The only difference is that the "span" of the cycle has expanded considerably. A careful examination of the charts on an intermediate/long-term basis easily reveals that--at least up to now--the continuity has not been broken. At this point in time there is nothing to suggest that anything has changed with regards to gold/gold stocks. In fact, everything suggests that the bull market is intact and bigger than ever.

POINTS OF SIGNIFICANCE

Assuming that the XAU will follow the pattern in the same way as it did in the previous two cycles, then the "bottom" for the current decline will be somewhere between 125 and 110.

It will take a weekly close below 98 for at least a couple of weeks to validate and legitimize any argument about  the end of the bull market in gold stocks. 

IF YOU ARE INTERESTED IN LEARNING MORE ABOUT TRADING YOU ARE INVITED TO ATTEND A FREE SEMINAR ON 6-24-06 IN LOS ANGELES, HOSTED BY MR. JAKE BERNSTEIN. I HAVE THE HONOR OF BEING ONE OF THE GUEST SPEAKERS. I WILL BE DISCUSSING HEDGING STRATEGIES AND OPTIONS TRADING TECHNIQUES. PLEASE VISIT THIS LINK FOR MORE INFORMATION, AND TO REGISTER:

http://www.trade-futures.com/LAX_SMNR2.htm

Ike Iossif

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