For most of this year gold has been navigating a symmetrical triangle, mostly above 900. Recently it broke out of that triangle and is challenging the resistance at the all-time closing high of 1005.5. For any breakout above that level to be "decisive" -- not likely to fail -- gold would have to reach at least 1036. We are on a buy signal for gold, and the chart is bullish, so we should assume that the outcome will be bullish; however, note that the resistance in this area has been quite stubborn for almost two years.
Gold and the dollar have an inverse relationship, but more recently gold has not been as strong as the dollar has been weak. I interpret this to be a result of the heavy buying of gold that took place as stocks were crashing in 2008 and 2009.
A final observation, many analysts have characterized the large "V" formation that began in early 2008 and runs through the present as a reverse head and shoulders pattern. I respectfully disagree because I believe reverse head and shoulders patterns belong at bottoms, while head and shoulders patterns belong at tops. That said, I am going to use head and shoulders theory to conjure an upside target in the case of a breakout. Measuring from the bottom of the "V" to the resistance at 1005, would give me an upside target of about 1300. Pretty lame, but it's the best tool I have for now.
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Last week I had expected that the S&P 500 would experience another down leg in a correction. Instead, we got a new rally closing high on Thursday. Market internals have not changed significantly since last week, except that short-term indicators are more overbought, so I'm going to continue to look for a correction. This is all rather academic, since we are on a medium-term buy signal.
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Bottom Line: Gold closed right on the line of overhead resistance. If it can continue with a decisive breakout, I have an upside target of 1300.
The stock market is overbought, but it has not given us a reason to move out of stocks. Overbought conditions make it a bad time to open new longs because of the possibility of a price correction to clear the condition.
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QUESTION: In July you said that gold had decisively broken its support and was heading down. Today I see that you have gold as "bullish." I don't remember you mentioning it in your Spotlight. When did you get back to the bullish stance and when did you tell your subscribers that you had changed your opinion? Perhaps, I didn't even see it when it was announced. Thank you.
ANSWER: The Chart Spotlight articles are simply items of interest at the time they are written. They are not intended to be a newsletter where I endeavor to present continuous analysis on gold, bonds, and stocks to subscribers. I retired from writing the newsletter two or three years ago.
At some point a forecast can be assessed as having been blown out of the water. This is one of those cases. We have been bullish on gold as of 7/17/2009. Subscribers can check signal status daily in the Decision Point Alert Daily Report.
Carl
QUESTION: Last week I guess I was expecting a comment on the negative divergence that is now visible on the daily charts of many major market indices, is this not something you consider? Although we have seen a small downside move (with some reasonable volume), I believed that this is a relatively rare signal and in the words of one of my former TA tutors when you get the signal it is the time to just "close your eyes and go short" (I am short).
ANSWER: Acknowledging that you may well be right, I must say, with respect, I think that is horrible advice. Negative divergences abound, but, during a bull market, bull market rules apply. This means that you should expect bullish resolutions from bearish setups. That is to say that the odds are strongly against you when you buck the primary trend. Of course, at the bull market top, negative divergences are 100% prescient, but you won't know it is "the" top until long after the event. In the meantime, trying to pick the top all the way up will prove costly.
Carl
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
