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When a roller
coaster plunges it’s gut-churning, heart-racing, blood curdling, in a
word--petrifying. That’s how precious metals investors must have felt
Wednesday when gold plunged more than 5 per cent to hit a low of $1,688.44
ounce, after earlier trading as high a $1,791.49 an ounce.
On Tuesday,
the day before the plunge, we had sent out a Market Alert in which we included a list of bullish
and bearish factors (actually, 6 of them, please click the above link for
details) and reiterated our suggestion to stay out of the market with short
term speculative positions as we felt that the situation was too dangerous.
It seems that we were a lone voice and some of our subscribers even canceled
their subscriptions annoyed that we were saying that the situation was
bearish when gold prices were going up. We can only hope for their sakes that
they didn't open any long positions.
Please allow
us to digress a bit. Being a lone voice suggesting a downswing is one thing,
but we have just learned that those analysts, who didn't see the correction
coming, are now blaming some certain events that took place on Wednesday or
even resort to manipulation theory. We find it a bit odd. Yes, in a way, all
markets are manipulated as the money supply / interest rates are subject to
gov't control and there are indications that gold and silver markets are being
manipulated, but that doesn't mean that all sharp moves (especially the
"unforeseen" ones) should be viewed as resulting from price
manipulation. Events - yes, there were some bearish news for
precious metals on Wednesday, but on any given day there are multiple bullish
and bearish pieces of news. Why do sometimes news affect price and sometimes
they don't? Emotionality of investors and traders is the answer and technical
analysis (and related approaches) can help one to prepare themselves for
these sudden moves. Not all of them can be predicted, but a lot of them and
just because other methodologies didn't allow one to see a plunge coming,
doesn't mean that one should explain with manipulation. In this week's case,
the markets were bound to correct based on the self-similarity between 2006
and now and many other technical/emotional factors and we've been writing
about it in the past few weeks. Simply put - ignoring technical analysis can be
costly and we believe that explaining all sharp market moves with
manipulation theory is not appropriate - especially if they could have been
reliably predicted using technical tools.
Wednesday was
a tense day as the dollar rose, gold plunged and a rally in equities came to
a halt. This was accompanied by a testimony by US Federal Reserve Chairman
Ben Bernanke who dashed hopes for additional growth stimulus (this is one of
the above-mentioned "events"). Bernanke testified that recent
developments in the labor markets were “positive” and that
inflation may go up “temporarily” given recent gasoline price
increases. But the chairman gave no hint of further easing. Investors had
hoped the Fed will launch another round of quantitative easing, pushing cheap
money into the market that would boost inflation, against which gold is a
traditional hedge. Our take is that we will see more cheap money, and what we
have right now is temporary smoke and mirrors.
Keep in mind
that although quantitative easing is good for precious metals, so is
inflation. So, if the Fed chairman himself is talking about inflation, the
market could just as well have taken that to be a positive indicator for gold
prices – in a way, higher gold prices represent inflation (measuring a
decline of dollar’s value against the true money).
The decline
in gold was accompanied by a decline in stock markets a day after the Dow
broke through 13,000 to hit a nearly-four-year high. And on Wednesday, the
NASDAQ briefly topped 3,000 before pulling back as Bernanke's remarks took
the air out of the rally. Even with the day's decline, the major indexes were
able to post their strongest February in years. And even with
Wednesday’s decline, bullion is still up 10 percent this year, on track
for its 12th consecutive annual gain.
Having
emphasized technical analysis’ role in the process of investment
analysis, let’s move directly to the charts. We will start with a look
at the long-term gold chart (charts courtesy by http://stockcharts.com.)
In the
long-term gold chart (please click on the above chart to enlarge it), we can
clearly see a continuation of the self-similar pattern. Gold bottomed at the
end of 2006 when it reached the 50-week moving average. Today, this moving
average is still considerably below gold’s recent price levels. Since
the 50-week moving average is trending higher, a week or two more of
declining prices should result in gold’s price and the moving average
meeting somewhere in the $1,650 range.
One other
note concerns the RSI levels. In 2006, gold reached its bottom with the RSI
level slightly below 50. Thursday’s close saw an RSI level close to 54
and declining, very much on pace to possibly close in to the very level seen
nearly six years ago.
 
The
gold-to-bonds ratio chart gives us a unique insight into the similarities
between 2006 and today from a perspective which is quite different from
studying gold itself. This chart also provides us with similar signals and
confirms the self-similar pattern.
In both time
frames, we have first seen a correction (following the 2005-2006 and
2010-2011 rallies) to the 61.8% Fibonacci retracement level and then a move
back up to the 38.2% level. The small moves in ’06 and ’12 above
this line were both followed by declines. This is more or less where we are
right now. In 2006, we next saw a small bounce and then a decline to the
final bottom.
It appears
that in our current situation, a small bounce could also be seen next
followed by a decline slightly below the 50% Fibonacci retracement level.
Although this decline does appear small from the ten-year perspective, the
dollar value could actually be fairly significant.
We now turn
to the chart from 2006-2007 as we have done for a couple of weeks now. We
have inserted a red ellipse to correspond to where we are presently in
reference to the trading patterns seen back then. Based on this chart, it
seems that a small rally is likely to be seen next. It does not appear large
enough to bet on based on our analysis of current market trends, however.
Now,
gold’s next move to the upside (the above-mentioned bounce) could turn
out to be as big as we saw back in 2006 but this is no guarantee that the
analogy be as precise. So, based on this chart alone, we expect to see a move
to the upside very soon followed by a decline to slightly below the 50%
Fibonacci retracement level of the previous rally. Where would that exactly
be? Let’s take a look at the current short-term chart to find out.
In the
current short-term GLD ETF chart, we see that the previous upside target has
been reached (its lower part) and downside target level for the coming
decline is in the $160-$161 range. This corresponds to about a $1,650 price
for spot gold. Recall that in 2006, the initial part of the decline was seen
to the first Fibonacci retracement level.
We have seen
this take place (on Wednesday this week) and also saw a bounce on Thursday.
This bounce is quite a normal move coming immediately after a huge decline.
Some sideways trading or a slight move higher on low/declining volume levels
would confirm that the short-term trend is indeed now to the downside. The
decline to our target area will likely be seen sometime in the next two
weeks.
What is
important in looking at the 2006 pattern is to remember that sometimes
history has the unique characteristic of repeating itself. While some people
defy that, it seems that history may actually “rhyme” –
copy some patterns, often on different scales. Recall, that both the price of
gold, and its moves in 2006 were at different levels than they are now. Yet,
thanks to our analysis, we are able to spot places where patterns may be
repeated and, thanks to that, we may somehow limit the uncertainty present on
the precious metals market – and that was the case this week.
In this
week’s chart of gold from a non-USD perspective, there was a
development worth noting. In last week’s Premium Update, we stated that
a significant resistance level is about to be reached which would imply a
pause or correction. From this non-USD perspective, gold actually declined to
a support level this week after topping at the resistance line created by
previous highs. If this support line (just below the 63 level) is broken,
another is in place close to 60.
With respect
to the USD Index, we have a few possibilities for the coming weeks. If gold
declines without any real action in the USD Index, the ratio here will likely
move to 60 or so, where it will encounter the second support line. If
however, the USD Index moves higher and gold prices decline, the non-USD
ratio will likely trade sideways and then resume its rally in a week or two. Specific details
are not yet forthcoming from this chart.
Looking at
the long-term chart of gold from the perspective of the Japanese yen, we do
not really see many signals. However, from an educational standpoint,
providing this chart seems justified. The above picture confirms that the top
is in with gold having moved to the middle of the trading range and RSI
levels in the overbought range. This means that when we see this combination
of signals again, we will likely have another local top. Please note that
there were many cases in the past when local tops in gold were indicated by gold:xjy ratio (gold priced in
yen) moving to the middle of its trading channel.
Right now,
the RSI levels have recovered somewhat and gold does not appear to be
overbought or oversold at this time. This chart therefore does not provide us
with any important timing details at this time.
Summing up, the self-similar pattern with 2006 is
clearly still in place. We expect gold to bounce a bit higher and then
decline. The coming bounce does not appear large enough or sure enough to bet
on and the short-term trend now appears to be bearish. If gold trades
sideways or moves higher on low volume in the coming week, this will confirm
the bearish outlook and it will likely remain in place for the next 2 weeks
or so.
Even though,
from time to time gold moves down sharply, it doesn’t mean that all of
these moves are a result of market manipulation. At least some of them can be
successfully predicted and avoided in advance thanks to applying technical analysis
and other related methods.
Thank you for
reading. Have a great and profitable week!
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