Technical observations of RossClark@shaw.ca
The US gold price staged a triangular consolidation pattern through mid summer. The first attempt to breakout was thwarted in August as prices retreated below the breakout ($440) and tested $430. The subsequent rally has managed to achieve new multi-year highs. This type of breakout following a consolidation of seven-months or more has occurred only once in each of the past three decades. The following charts display each example together with the pre-eminent gold miner of the day.
Once the bullion price manages to make new highs the correction must hold above the old high (✓) at which time the mining stock makes a successful kiss of its rising 20-day exponential moving average (✓). The key point here is that this pullback to test the breakout in gold becomes a measuring point for the ensuing rally. Based upon the previous three examples, from the initial bottom ($412.90, Feb 8th), the current pullback ($463, Sept 23rd) should be at 38% of the total rally. This calculation provides a target of $542. While the bullion price may achieve a marginally higher high, traders should sell the mining stocks once this target is reached.
Gold Priced in Various Mediums
The gold trend has been up for the past month whether it is priced in US Dollars, Euros, Canadian Dollars, CRB Index, Crude Oil, the Dow Industrials or S&P. This is the sign of a true bull market.
The breakout in the Euro-Gold price at €350 in June and successful test in July has resulted in a rally to €394, approaching our minimum target of €400.
The Gold/Crude Oil ratio and the Gold/CRB ratio are coming off multi-year lows. The following chart displays the Gold/CRB ratio, Gold in US Dollars and the RSI of the ratio. Interim highs in the bullion have been concurrent with RSI readings over 65. Even though this has been an excellent rally, we are only into a neutral territory with lots of room before becoming overbought.
You can also see that since 1987 the Gold/CRB ratio (currently 1.42) has found the 1.60 level to be a significant support/resistance level. Once again we are nowhere near that resistance.
The XAU and HUI mining stock indices outperformed the bullion from the bottom in May through the end of September. However, a bearish divergence has become evident in the past ten days. If the divergence remains in place and prices break the support line (currently 108 in the XAU) a sell signal would be confirmed.
From the following chart you can see how poorly the juniors have performed in the past 21 months. While they are up 20% since the May bottom they are still a good 25% off the highs. If gold makes the run to $542 it should do wonders for this group.
The Commitment of Traders data is back into dangerous territory once again. The commercials are short a net 202,724 contracts. The non-commercials are long a net 171,498 contracts. Both are at extreme levels dating back to at least 1986. This makes prices vulnerable to any negative news, but does not guarantee a break. Note that the runs of April 2002-May 2002, December 2002-February 2003, December 2003-January 2004 and October 2004-December 2004 occurred with extreme readings. The best rallies in any market occur when the open interest is rising together with the price. Such is the case right now.
Arrows denote signals from the GoldWorks COT Model. In non-trending phases or when signals are in the direction of the underlying trend the market reverses quickly. However, following upside breakouts from consolidations it generally takes seven to nine weeks of signals to reverse the trend.
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