Technical observations of RossClark@shaw.ca
Gold support is around $600 over the next few weeks, but need not be tested. This is the 50% corrective support from the October 24th bottom. On the upside, $775 looks quite attainable for the next leg of the bull market. Look for selling pressure after an overbought reading in the second half of February.
The consolidation pattern since the break from the May high should be quite familiar to followers of the gold market. Some of the most noticeable examples occurred in 1973, 1974, 1980, 1982 and 1987. Each managed to correct 50% to 60% of an exponential rally (June 14th), then almost as quickly made back 50% of that break (July 14th), only to then violate a well established support line but have little follow through on the downside.
The move into the September bottom was coincident with an RSI (14) reading of 29. This fit perfectly with the action following times of conflict (remember Israel/Hezbollah last summer) as was outlined on July 26th - - "With the buying power spent, the gold price tends to ease lower until a resolution in the conflict becomes apparent. As traders then exit their long positions the market typically becomes oversold and generates an important low. In most cases this can be identified with an RSI(14) reading below 32."
The 'isolated low' of October 4th ($563) was labeled once prices exceeded $588 on October 18th and then confirmed after prices held above that low on October 23rd. This created a six week Head and Shoulders base pattern that was enough to drive prices higher by the height of the right shoulder and into the heavy overhead resistance of July and August. Assuming the support holds over the next few weeks our measured target is $775.
Previous consolidations patterns of similar structure
When could the next high appear?
The Economic Confidence Cycle (8.6 years) and its subsets have been very reliable in the gold market. We established trading rules in the 1980's that identified important highs around the date and lows in the weeks following the cycle date.
In a rising market the cycle date offers an opportunity to lighten up on long gold related positions and reestablish them on a hard break. For traders we will be looking to sell into to mid/late February. Longterm investors are advised to look for a pullback to add again in March.
In an uptrend we can expect the market to become overextended into the cycle date as seen in 2004 & 2006.
In a flat market with established overhead resistance the cycle becomes a point to move to the sidelines
In a downtrend it becomes a point to add to short positions
CHARTWORKS #2 - NOV 14, 2006
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