The gold market has been characterized by huge indecisiveness for several months now. Everybody agrees, that long-term gold has to go up, but the traders, investors and market analyst are divided into two camps regarding the short- and middle-term outlook of the world’s most important monetary metal. Some months ago I wrote an article about this (Gold Bears And Gold Bulls – Who Is Right, And Who Is Wrong, read under Articles). Never before in the history of precious metals trading have traders or investors been bombed with so many contradicting opinions and analysis. Precious metals have always been my primary field of interest in trading and investing - I subscribe to almost every important newsletter and analyst service, and read all important publications written by the most important PM experts and analysts. Just to summarize the current situation: almost ALL experts agree that within 2-3 years gold should be trading above 2000 USD/ounce (which would of course mean a similar price advance of silver, or maybe even more, as in the final stages of a bull market silver tends to outperform gold), but about half of them believe that gold would visit the 600-680 USD/ounce long-term support trendline again, while the other half of them are convinced that the gold price will never drop below the magic 1000 USD/ounce price level again, and, apart from minor corrections, gold’s way is cleared to the next psychologically important, 2000 USD/ounce price level and beyond.
Just to mention some of the short-term bearish "big names": Bob Prechter (elliottwave.com), Ronald Rosen (Rosen Market Timing Letter), and Dan Stinson (e-wavecharts.com). (Note: all three are Elliottists.)
In the other, stubbornly bullish camp are Jim Sinclair (JSMineset.com) and his CIGAs (Comrades In Golden Arms), David Nichols (fractalgoldreport.com), or Jason Hommel (silverstockreport.com). All of them had excellent calls in the past and are recognized market technicians or precious metals analysts, so it is no wonder if the average traders’ heads are spinning and all are confused and wondering whom to believe or whom to follow now.
Well, now I think I can add a valuable idea about forecasting the precious metals’ short- and middle-term market behavior.
Considering the fact that both gold and EUR topped out against the USD almost at the same time at the end of last year (at 1.5144 on Nov.25, 2009 and 1226.4 on Dec.03, 2009, respectively) and since then EUR dropped to 1.35 as of Friday this week, gold has been holding up remarkably well. The last time EUR has traded at this current level, on May 18 2009, gold closed at 918.3. Taking this at face value would mean a confirmation of the steady future uptrend, just as the most ardent gold bulls actually believe it is. On the other hand, we should not forget that the ongoing uptrend in the Dollar Index at this current level could be just a technical bounce, a direct result of the hysteria about the Greek debt situation, which is ridiculous as the population and economy of Greece, and therefore the importance of the Greek problems, does not exceed 2% of the population and economic output of the European Union. As a comparison, California is still among the ten largest economies of the world and is in a debt situation much more serious than that of Greece, and therefore should be a more serious drag for the US as a whole and for the USD as well.
So one thing is sure: the current market situation is an anomaly, and these current trends (uptrend in DX and Gold, downtrend in EUR) cannot co-exist and survive long-term. Something must give, and soon, and the more extended these trends are getting, the more spectacular the correction (or "normalization", the return to normal intermarket principles) will be.
But back to gold… What can give us some guidance is a good old classical chart formation, the Head&Shoulders pattern. This pattern, when confirmed, is a very reliable technical tool to predict a turn of a trend (from bullish to bearish, or bearish to bullish in case the pattern is inverse – you can read more about this pattern under the Forex Tutorials section of our website).
Currently we have two unfolding Head&Shoulders pattern in gold. One is of larger magnitude, which is an inverse, therefore bullish pattern:
So we could think that gold’s price action during the last couple of months must have been a typical bullish consolidation pattern prior to the big run-up, as the gold bulls predict. But as always, there is also a flip side of the coin. Like in the Zen philosophy, or almost any walk of life, the light never comes without shadow, the Yin without the Yang, or the good without the bad, this gold chart has a bearish Head&Shoulders formation as well:
Currently, both these patterns are unconfirmed. For the bullish version, the confirmation comes if gold drops to 1073 (which seems inevitable at the current juncture) but then bounces back from the 1073-1044 support zone and starts the new uptrend, which should then at least test the previous all-time high at 1226. To remain valid, this pattern must not test - not to mention fall below - the February 5, 2010 low at 1044 USD/ounce.
On the other hand, if gold is unable to bounce back and rise from the 1073-1044 support zone, but drops further and closes below the secondary, 1044-1033 support zone two days in a row in the coming weeks, it will be a very strong confirmation of the short- and middle-term bearish view, expecting gold to bottom somewhere between 600-680 before the end of this year. (Just a reminder: the 1033 level is the previous, 2008 all time-high, therefore now a very significant lower boundary of this support zone, the "last line of defense" for gold bulls).
If at any juncture we’ll get either a buy or a sell signal from our system, it will be an excellent opportunity to enter the market for a long-term, large-amplitude move in either direction.
Happy trading!
Silvertrader
PS. The charts don't appear in the Preview, so if they won't appear in the post either, you can view them here: http://www.sureforexsignals.com/chart/
Just to mention some of the short-term bearish "big names": Bob Prechter (elliottwave.com), Ronald Rosen (Rosen Market Timing Letter), and Dan Stinson (e-wavecharts.com). (Note: all three are Elliottists.)
In the other, stubbornly bullish camp are Jim Sinclair (JSMineset.com) and his CIGAs (Comrades In Golden Arms), David Nichols (fractalgoldreport.com), or Jason Hommel (silverstockreport.com). All of them had excellent calls in the past and are recognized market technicians or precious metals analysts, so it is no wonder if the average traders’ heads are spinning and all are confused and wondering whom to believe or whom to follow now.
Well, now I think I can add a valuable idea about forecasting the precious metals’ short- and middle-term market behavior.
Considering the fact that both gold and EUR topped out against the USD almost at the same time at the end of last year (at 1.5144 on Nov.25, 2009 and 1226.4 on Dec.03, 2009, respectively) and since then EUR dropped to 1.35 as of Friday this week, gold has been holding up remarkably well. The last time EUR has traded at this current level, on May 18 2009, gold closed at 918.3. Taking this at face value would mean a confirmation of the steady future uptrend, just as the most ardent gold bulls actually believe it is. On the other hand, we should not forget that the ongoing uptrend in the Dollar Index at this current level could be just a technical bounce, a direct result of the hysteria about the Greek debt situation, which is ridiculous as the population and economy of Greece, and therefore the importance of the Greek problems, does not exceed 2% of the population and economic output of the European Union. As a comparison, California is still among the ten largest economies of the world and is in a debt situation much more serious than that of Greece, and therefore should be a more serious drag for the US as a whole and for the USD as well.
So one thing is sure: the current market situation is an anomaly, and these current trends (uptrend in DX and Gold, downtrend in EUR) cannot co-exist and survive long-term. Something must give, and soon, and the more extended these trends are getting, the more spectacular the correction (or "normalization", the return to normal intermarket principles) will be.
But back to gold… What can give us some guidance is a good old classical chart formation, the Head&Shoulders pattern. This pattern, when confirmed, is a very reliable technical tool to predict a turn of a trend (from bullish to bearish, or bearish to bullish in case the pattern is inverse – you can read more about this pattern under the Forex Tutorials section of our website).
Currently we have two unfolding Head&Shoulders pattern in gold. One is of larger magnitude, which is an inverse, therefore bullish pattern:
So we could think that gold’s price action during the last couple of months must have been a typical bullish consolidation pattern prior to the big run-up, as the gold bulls predict. But as always, there is also a flip side of the coin. Like in the Zen philosophy, or almost any walk of life, the light never comes without shadow, the Yin without the Yang, or the good without the bad, this gold chart has a bearish Head&Shoulders formation as well:
Currently, both these patterns are unconfirmed. For the bullish version, the confirmation comes if gold drops to 1073 (which seems inevitable at the current juncture) but then bounces back from the 1073-1044 support zone and starts the new uptrend, which should then at least test the previous all-time high at 1226. To remain valid, this pattern must not test - not to mention fall below - the February 5, 2010 low at 1044 USD/ounce.
On the other hand, if gold is unable to bounce back and rise from the 1073-1044 support zone, but drops further and closes below the secondary, 1044-1033 support zone two days in a row in the coming weeks, it will be a very strong confirmation of the short- and middle-term bearish view, expecting gold to bottom somewhere between 600-680 before the end of this year. (Just a reminder: the 1033 level is the previous, 2008 all time-high, therefore now a very significant lower boundary of this support zone, the "last line of defense" for gold bulls).
If at any juncture we’ll get either a buy or a sell signal from our system, it will be an excellent opportunity to enter the market for a long-term, large-amplitude move in either direction.
Happy trading!
Silvertrader
PS. The charts don't appear in the Preview, so if they won't appear in the post either, you can view them here: http://www.sureforexsignals.com/chart/