There
has been a great deal of excitement about the recent performances of gold and
silver with most analysts extremely optimistic regarding their potential.
That being said technical analysis shows that gold is in for some very choppy
seas ahead compared to the surging seas of the Chinese stock market. Perhaps today
the refrain "Got Gold?" should be replaced with the words,
"Buy Chinese Stocks!"
Gold
in a Bull Market With a Bearish Basis for the Intermediate-Term
At
this point with the gold price sitting at an all-time high it has developed
two major patterns that should draw our attention.
1.
Ascending Broadening Wedge
The
first pattern is a 7-year Ascending Broadening Wedge or megaphone formation
confined by line A and line B. This pattern is similar to a rising wedge but
with a broadening price pattern and it tends to appear in a bull market with
a bearish bias. The most important feature of this pattern is that the swing
amplitude between two boundaries becomes larger and larger, and price
movement gets more and more volatile. This feature indicates that price
sooner or later will have a downward swing to re-touch or re-test the lower
boundary (line B), although the big upward swing generates a great attraction
like fireworks.
Gold
currently has a very broadening range between 900 and 1400. Once a downward
swing happens, a drawdown could be very significant, with no mention of any
potential downside breakout.
2.
Rising Wedge
The
second pattern is a 2-year Rising Wedge formation confined by line A and line
C. This pattern also typically has a bearish bias but it can be realized only
when a downside breakout happens at the lower boundary of the wedge. It looks
like that two boundary lines of the current rising wedge on gold will merge
at near the price of $1,500. It indicates there is a big potential for the
price of gold to test the lower boundary line C of the rising wedge in the
next three to six months before reaching $1,500.
A
combination of an ascending broadening wedge and a rising wedge is a typical
characteristic of a state of increased disequilibrium driven by overconfident
market participants and is a sign of setting up a potential powerful
volatility storm in the near future.
Shanghai
Stock Exchange Composite Index Expected to Have a Fierce Advance Soon
Since
the bearish Death Cross in the early part of this year (see chart below) the
Shanghai Stock Exchange Composite Index (SSECI) has been depressed and has
been in a downward channel for the last 14 months. However, a new uptrend
should start after the bullish Golden Cross, which is defined by a successful
breaking through both the 17-week moving average and the median line of the
14-month downtrend channel. Please note that my definition of the Golden
Cross is different from the traditional Golden Cross of the 50-day and
200-day moving averages.
Indeed,
with the Golden Cross being confirmed on October 8th, the SSECI has surged
10% and is fast approaching the target level of 3,000 at the upper boundary
of the 14-month downtrend channel which probably will not be able to resist a
fierce advance.
Three
Peaks and the Domed House
A
special chart pattern, “Three Peaks and the Domed House“, is
emerging from China’s SSECI. With my modified version of George
Lindsay’s basic model (see below), the “Three Peaks and the Domed
House” pattern can be divided into five major phases:
1)
Three Peaks phase,
2) Basement phase,
3) First Floor phase,
4) Roof phase, and
5) Plunge phase.
This
modified version, using “phase-counting”, is a macro approach to
Lindsay’s basic model, and it is different from the classical micro
approach using “number-counting” from 1 to 28. In the chart the
SSECI is plotted as a red line against Lindsay’s idealized model in a
black line.
From
June of 2009 to April of 2010, the Shanghai index developed the “Three
Peaks” phase. Then it had a sharp separating decline to reach the July
2010 low at 2320 and formed the “Basement” phase during this
summer. Now it just started a rapid advance in order to build the
“First Floor” of the Domed House.
Calibrated
against Lindsay’s model:
a)
the SSECI should reach the “First Floor” phase near 3300 with a
10% upward move from the present price by the end of this year
b) the
target “Roof” phase of the Domed House is projected at 4200 for
the SSECI by the middle of next year which represents an 81% upward
measured move from the low of the “Basement” to the high of the
“Roof”.
(Last
week Market Vectors China ETF (PEK) was launched by Van Eck Global with the
claim that it is the first and only U.S. listed ETF designed to give
investors exposure to China’s A-Shares market. It would appear to be a
very timely introduction!)
Conclusion
There
you have it! The ascent of the price of gold to $1,500 is going to be VERY
volatile over the next few months while the Chinese stock market is about to
take off in a major way. The choice is yours.
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Dr.
Nu Yu (fx5186.wordpress.com/), co-founder and president of Numarkan
Investments and an affiliate of the Market Technician Association, is a
frequent contributor to www.munKNEE.com “It’s all about
MONEY” and www.FinancialArticleSummariesToday.com “A
site/sight for sore eyes and inquisitive minds”. He can be contacted at
editor@munknee.com
Lorimer Wilson
MunKnee.com
Lorimer
Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial
writer. He is also a frequent contributor to this site and can be reached at
editor@munknee.com.
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