Sectorwide Buy Alert
Gold powering up for major
Jan 29, 2007
Gold is looking technically
stronger than it has done for the past 16 months. It would have
escaped the notice of many that it broke out last week from a
little-known technical pattern known as 3-arc Fan Correction.
This pattern was not detected earlier because it is rather rare,
and instead attempts were made to define the action in gold since
last May as some kind of triangle, which could, of course, be
bearish. However, a 3-arc Fan was clearly identified in the Streettracks
chart last week on www.clivemaund.com, prompting a re-examination
of the gold chart, whereupon it became evident that a similar
pattern exists in gold. This is very important, because it largely
sweeps away lingering doubts about where gold is headed. This
is because these patterns are very bullish, and seldom break
We will now examine this pattern
on a 1-year chart for gold. The first steep arc of the correction
pattern was formed by gold dropping rather precipitously from
its May high, where it was extremely overbought, way ahead of
its moving averages. A sizeable relief rally followed which led
to renewed decline beneath the second fan downtrend line that
took the price down to successfully retest support above the
June low. Gold then rallied again, breaking above the 2nd fan
line only to once again go into decline beneath the much less
steep 3rd fan line. Unknown to most of us at the time, it was
contact with this fan line at the start of this year that triggered
the plunge which got the year off to such a bad start - although
we had anticipated just such a drop for other reasons.
There are a couple of important
points to note about these fan corrections. The first is that
what they are is a succession of progressively less steep downtrend
lines that contain the price, and indicate a diminution of selling
pressure over time - by the time the fan correction ends with
a breakout such as we saw last week, significant selling pressure
has quite simply been exhausted. This brings us to one of the
rules that applies reliably to these patterns, and that is that
once the price has succeeded in breaking out above the 3rd line
of the fan pattern, that's it, the correction is over and the
stage is set for a substantial new uptrend. This is exactly the
position we find ourselves in now.
Now compare the gap that existed
between the price of gold last May and its moving averages with
the gap that exists now. Last May it was horrifically overbought
with an enormous gap having opened up with its moving averages.
Now, however, the gap is comparatively minor, and all 3 moving
averages are in bullish alignment. This makes for big upside
potential. Note that the averages used here are 50, 200 and 300-day.
The reason for using the 300-day moving average will become readily
apparent when we look at the 3-year chart lower down the page,
where it is evident that gold has ridden this moving average
all the way up as its bullmarket has progressed.
Because gold stalled out again
at the zone of heavy resistance centered just above $660 last
week and didn't actually end the week up all that much, many
investors haven't cottoned on to the significance of last weeks'
breakout. So let us be absolutely clear, it was MASSIVELY SIGNIFICANT,
and we shall be much obliged to those sellers last week who are
providing us with a last chance to board the train before it
leaves the station. This is the time to load up with promising
stocks across the board. Of course, we must recognize that no
technical pattern guarantees success, and there is, as ever,
a chance that the pattern will abort and break down, but if it
does we can escape with a minor loss by employing the strategy
of exiting positions in the event that gold breaks back down
below the 3rd fan line by a margin of more than $5 - $7. This
proviso affords an excellent risk/reward ratio to those buying
stocks here. Readers may recall that in the last Gold
Market update it was mentioned that Straddle options (a combination
of Call and Put options) were an attractive proposition, as gold
was on the point of a big move, which could be to the downside,
and that an article on this strategy would be posted soon on
the site. In the light of the subsequent identification of the
fan pattern in gold and the developments over the past week,
however, the picture is viewed as being more outright bullish,
so anyone considering options should go for the Calls and forget
the Puts. Before leaving the 1-year chart observe the position
of the MACD indicator shown at the bottom of the chart. This
is only slightly overbought and provides a further indication
that there is plenty of upside potential at this juncture.
Now we will review the 3-year
chart as this puts the action of the past year into perspective,
thus giving us more of an idea of what to expect going forward.
On this chart we can see how the 3-arc Fan Correction has served
to unwind the severely overbought condition that had developed
by April - May of last year, as indicated by the yawning gap
with the moving averages which has now largely closed up. The
identification of the fan correction means we can be much more
assured that gold is going up from here than was the case when
we were trying to find a triangle fit for the trading range.
This is because triangles can break either way, and a triangle
can therefore be a top, whereas this fan correction is definitely
bullish, and we have the added benefit of a close exit point
if it aborts. In addition to the usual 50 and 200-day moving
averages, the 300-day moving average has been appended to both
charts. This is because, throughout the bullmarket, gold has
consistently found support near this average, as it did again
in October and in the early days of this month. Note also how
the price and the bullishly aligned moving averages are now bunched
quite closely together, a circumstance that frequently precedes
a powerful advance, as was the case in the late Summer of 2005.
In conclusion, this is a most
auspicious picture. Gold is a flat-out buy here, as are most
Precious Metals stocks. The reaction late last week is viewed
as providing probably the last opportunity to buy both gold and
PM stocks at favorable prices before a powerful advance gets
underway, although it is quite common after a breakout above
a fan line for the price to drift back and run along the top
of the fan line for a while before turning higher - if this happens
it will provide an opportunity to buy at even better prices.
We have a relatively close exit point if things go wrong, as
stated above, as positions should be closed out if gold drops
$5 - $7 below the 3rd fan line of the fan correction. Thus we
have a very favorable risk/reward ratio. While developments in
the gold chart clearly have major implications for the silver
price, a similar 3-arc Fan Correction has not been identified
on the silver chart.
We will be reviewing a range
of US stocks suitable for purchase on www.clivemaund.com this
Jan 28, 2007
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Visit his subscription website at clivemaund.com. [You can subscribe
No responsibility can be accepted for losses that may result as
a consequence of trading on the basis of this analysis.
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