technical analysts is one of our professions, so it is quite rarely when we
feel any emotions regarding the market regardless if we’re making
substantial gains or if we’re on the losing side. But, off the record,
we will admit to a slight twinge of a thrill when gold broke the
psychological barrier of $1,600 an ounce this Monday.
Putting aside the discussion on whether
a breakout is likely to happen or not, it’s a great feeling having a
front-row seat to the greatest investment show in town. And the best part is
that it’s still Off Broadway and the crowds haven’t yet
discovered it, so there is still time to get good seats.
How many of you remember the feeling
when gold broke above $400 in December of 2003? Perhaps not all of you were
in the gold trade at that time. So, let’s jump forward to March 13th,
2008 when the benchmark gold contract traded over $1,000 for the first time
in the U.S. futures market. The $1,000 mark—that was a big one!
We remember other landmarks on
gold’s upward journey. On December 1, 2009 - Gold climbs above $1,200
an ounce for the first time as the dollar dropped. On September 27 of that
year, spot gold prices vaulted to the $1,300 an ounce mark. Just two months
later, on November 8, gold prices broke through the $1,400 an ounce mark as
haven buying prompted by renewed budget problems in Ireland more than offset
a sharp dollar bounce. It wasn’t so long ago that gold shot up above
$1,500 an ounce on April 20th of this year as worries over the health of the
global economy boosted the metal as a safe haven. And that brings us back to
that lovely round number, $1600, achieved this week.
With the psychological barrier touched,
it seems that this week the most important part of the analysis will come
from the precious metals themselves. So, let’s take a look at the
yellow metal (charts courtesy by http://stockcharts.com).
In this week’s very-long-term
chart for gold, we barely see any changes. Gold has moved right to the
resistance level created by extrapolating previous tops and bottoms. As we
stated in our previous essay on the gold correction:
In very long-term chart for gold, we see
a third attempt to move above the long-term rising trend channel. In late
2010, a similar attempt was unsuccessful and was followed by a significant
decline. Certainly this could be the case this time as well. Naturally, we
could see a true breakout, however so far it has not been confirmed yet, so
we remain skeptical.
The current momentum, which gold has
shown at the first sight seems to make the breakout theory quite probable
(rallying on strong volume is bullish phenomenon), however, even gold is to
rally strongly from here, a correction will likely be seen before additional
significant upward movement starts. Please note that there is a strong
resistance level created by extrapolating previous tops and bottoms and using
the Phi #1.618. This is just above $1,600.
If gold can move above this level and
confirm its move, the next target would be well above current prices. This
would be quite a rally from here, but such a move does not seem very likely
over the next few months – at least not yet.
This week we did see prices reverse
slightly and they are now consolidating. No breakout has yet been seen and
our previous comments remain up-to-date. The situation continues to be quite
similar to what we saw late last year (triple top) and it is clear that the
consolidation at that time was quickly followed by a decline.
There was not breakout in gold stocks
In this week’s HUI Index chart,
little has changed and the chart is basically the same as what we presented
to you last week. We continue to see a sell signal from the RSI level and the
index level is at a noteworthy resistance line. No significant decline has
been seen yet but it does appear to be quite likely in the near future.
In this week’s short-term GDX ETF
(another proxy for the mining stocks) chart, we see more of the same,
although the situation is a bit more bullish here. A recent consolidation
resulted in a bit higher mining stocks’ prices than it was the case
with the underlying metals.
Thursday’s decline was less
significant here than were the declines for gold. The volume action seen was
not too bullish however. The price decline on Thursday was accompanied
by higher volume than was seen in Wednesday’s rally. It is possible
that the sign of strength seen here is at least partly attributable to the
recent rally in the general stock market.
Summing up, the situation
for the precious metals market appears very bullish at the first sight, but
taking a second look reveals that the true breakout remains to be seen.
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Thank you for reading. Have a great and