Gold seems to have found a resistance level. It could be the 1 year cycle high that was suspiciously absent when I wrote, F.S.N. "Gold, a Cyclical Recipe for Disaster "
Here is what I said:
"The next thing we need to do is define what the 1 year is doing, we don't want it blindsiding us with a sudden clunk. Here it gets fuzzy, there is no clearly defined low to make a call on. Also there is a very strong seasonal cycle in gold that makes its lows in the summer and tops out in the February to March time frame, it also has to be factored in. What I have done is tentatively peg it as the low in late October, but I also realize it could come in anytime now as well. I also know that the fat boys are extremely short gold futures. So I guard our positions with stop loss orders and won't be surprised by a sudden melt down. If it has not been made yet, it has to be soon, before the end of the year."
I thought I should follow up on gold now that we have turned down.
We sold the last of our gold trading positions right on the highs. Now the question is, what comes next. Is this the end of the run? Has the bubble burst? How far will it fall? Is there any way to know? Lets check it out.
In the chart below I show a thirty four year chart of gold. In it I have marked the 8 year cycles with stars and red lines. The blue line shows the most recent cycle low which occurred in October of 2008. We should not see another big low for 8 years. What we should see is the first 1 year cycle low since making the 8 year cycle low, I believe we are seeing it now. If you have not done so, please read the original article by clicking the link above.
In the chart below, I have narrowed the focus. This chart is of the GLD ETF. It is the last five years on a daily basis, it shows the 8 year cycle low which I believe we made last fall. It clearly shows the inverted head and shoulders pattern from which we broke out in October of this year. The objective of this H&S pattern should be 133. It is normal for a H&S pattern to return to the right shoulder area after a breakout.
In this chart we see several areas of high volume frothy areas, which I have marked in red. The high volume area in 2006 was big at the time but the ETF was new then and gold was not in the public eye either.
There are a number of ways to project the size of a correction, expect a retracement to a moving average or a trend line is one way. Fibonacci levels, which expect 50% or 62% retracements of the last leg up, is another. I did not put them in the chart.
The 200 day exponential moving average is popular and often a strong support level. It is currently at 98.30 and is moving up quickly. If you don't know how to use these methods please contact me and I will be happy to give you the different levels.
I thought I would use a different approach here. We will see how well it plays out.
As I said last month, if we were going to make a 1 year cycle low it would have to come this year. Well, here it is. The big question I am asking is, can it make its low and turn up by the end of December? That remains to be seen but I will watch carefully to see what happens.
In the chart below, you will notice I have marked three areas in different colors. They are corrections from previous spike tops, often occurring after things get a little too frothy. Notice that the kick backs we have seen in the past seem to put a damper on GLD's Mojo for more than a few days.
In the chart below, I have taken those color-coded previous corrections and spliced them, full size, into the current price action (see the box in the five year chart). I began at the 8 year cycle low made last fall and ended at the recent all time high. The results are interesting and gives us an idea of what to expect over the coming days.
I would like to see an early low like the one on the left (orange). It would be ideal because the 1 year cycle low should bottom in 2009. It may take until the end of the year to find a solid bottom.
Above, we see that the previous corrections took months to play out. We also see the 102.50 level may become a turning point this time. That is interesting because it is also the 50% retracement level of the leg up that began in April. In a couple of weeks the 200 day M.A. will have moved higher as well. The smaller blue correction on the right is also possible, especially if the bulls are still pawing the ground.
In my email advisory, as well as my article on F.S.N. covering the US$ , I suggested a year end rally was probable in the dollar because a 1 1/2 year cycle was bottoming. Plus, the dollar tends to rally at year end as American multinationals repatriate their profits and convert them into dollars.
It looks like more downside is possible for gold and then patience will be required as the margin traders get squeezed out. I have posted the latest commitment of traders report on my blog. It shows that the "Fat Boys" are starting to cover their shorts, grudgingly.
As Yogi Berra would say, "It is like deja vu all over again."
