Monthly Gold Chart

I wanted to see how this week's price action in gold would resolve itself so that I could do a bit of analysis on the market. Keep in mind that this is LONG TERM stuff. The nature of markets nowadays being what it is (they are run by hedge fund algorithms which do not think but just issue buy or sell orders automatically once certain trips are triggered) it helps to get a sense of where we are in the general scheme of things by looking at the larger picture to see if we can identify a long term trend.

I realize that the chart is cluttered but it needs to be in order to show the areas I have pinpointed that need some attention given to them. I have laid out TWO separate Fibonacci retracement patterns starting with the 2001 low and extending to the 2011 peak PLUS one starting with the 2008 low and running to that same 2011 peak up above $1900.

Then I have drawn in TWO separate pitchforks - one for use during the bullish phase and one for use during this now bearish phase.

I am interested in seeing the intersections between these various levels that are generated. Look at the area I have noted with an ellipse. It contains TWO Fibonacci retracement levels - the 38.2% retracement of the entire rally beginning in 2001 and the critical 50% retracement rally from the 2008-2011 rally. Can you see how those center around the $1300 level?

Now note the two pitchforks - the one uptrending, and the other downtrending and locate the intersection of the median or middle lines in both forks. Can you see how it come in right on top of the previously mentioned TWO Fibonacci retracement levels?

What does all this entrail reading denote? Simple - the area near and around the $1300 level is now critical for gold's fortunes as we move forward.  I believe it has as much significance as the former support zone back up near the $1525 region.

If this region fails for any reason, gold is going to fall first to $1200 and then possibly $1100 - $1092.  That would dovetail with the BEARISH FLAG FORMATION I have noted on a previously posted daily gold chart that would target another $200 drop if this week's low were to be violated on HEAVY VOLUME.

If the bulls can hold this market above this week's low but certainly above the $1300 level, then they stand a real chance of forcing a period of price consolidation or sideways movement. I believe it is too much to expect this market to ricochet sharply higher after the psychological beating that the bulls have received this past week.

While it is certainly encouraging to see the strong physical offtake that these lower prices are stimulating, it will require the return of the hedge funds to the long side of this market to take it sharply higher. for that to transpire, we must see fears of inflation displacing fears of deflation or slowing growth. Falling interest rates globally are showing that currently there exists no fear of inflation from Central Bank money creation at this point.

This week's Commitment of Traders report might be misleading to some because it shows Hedge Fund short covering occurring. Some might be tempted to think that they are abandoning the short side of the market. What needs to be understood is that gold plummeted over $200 in the matter of a couple of days. When it hit $1320, some shorts prudently booked some profits. The market then popped $40 off of that level. The next day, Tuesday, it fell back down to that $1320 level, but rebounded all the way back up towards $1400. That buying was SHORT COVERING on the part of the hedge funds. Once it showed that it was not going to break support, they rang the cash register on some short positions. They are however looking to sell rallies so they probably re-entered above $1400 during today's session (Friday).

We saw similar data in the COT for both silver and copper. Both of these metals showed that same short covering by the hedgies. In copper they covered some of their shorts below the $3.25 level on Monday and Tuesday. In silver, they covered some of their shorts on the steep fall towards $22. The trends in these metals are lower however and that means rallies will be sold by the speculative crowd dominated by the hedge funds.

To force some of these guys out of their short positions, it is going to take a concerted effort by the bulls to push price high enough to trigger their algorithms into buying. I am not sure where that catalyst might come from in the very near future. For starters I would need to see some sort of upside reversals in various commodity futures markets, notably copper and crude oil/gasoline and then the grains. In other words, the CCI would need to forge a bottom and show a definite upward turn with a trend change.

Fundamentally, we need to see a rise in real wages as well. Interest rates also would need to show a shift in the curve towards anticipation of inflation by the bond markets. They will pick it up long before the herd that looks only at equities figures it out.

Gold sees Strong Short Covering in Asia

Last evening here in the US, while watching the gold price action, it was evident that the reports of strong physical buying spooked a fair number of weak-handed shorts. In watching the price climb, once gold poked its head above $1400, but especially $1402 or so, the stops got hit and up she went. Volume picked up as the stops were continuing to fire, until the market ran out of steam up near $1425 where it began to retreat.

That was the high point for the session. Once trading moved into New York and the PM Fix was over, with India and the rest of Asia now closed, bears were able to take the metal down below $1400 again before the pit session closed. However, in the after market it has been floating back above $1400 once again.

I would have liked to see this thing hold onto a handle of "14" but at least it closed firm even though it was down some $106 for the week.

We have some technical chart points now to work with on this market. Support is in the zone noted extending down from $1365 and below while resistance is last evening's high near $1425.

A couple of things can be said about this chart. First, the more ominous news - the chart is displaying a near picture perfect BEARISH FLAG FORMATION. (That formation is shown in BLUE). If this market were to somehow break support on the downside after showing a pattern like this, it would portend the possibility of another $200 drop before all is said and done. I shudder to think what that would portend however for the global economy because it would signal that the Central Banks and their money spigots have failed completely in the battle against deflation. If that were the case, the stock markets globally would implode.

Having said that, based on the type of solid demand mentioned this past week, I find it very hard to believe that this week's support zone will not hold. Again, if it does not, we are all in for a world of serious hurt.

The positive news from the chart is that the market has gone down to this support zone THREE TIMES this week and on each and every visit down there, it has encountered more buying than selling! Bears surely want to break it lower but they could not.

The other thing is that the HUI showed some signs of life this week after getting the snot beat out of it nearly nonstop over the last two week period. If this index can manage to somehow claw its way back above the 300 level, I would feel much more confident saying a long term bottom is in on that chart. That remains a good ways above the current level however with its close just shy of 270 this week.

Again, I strongly believe that since the mining stocks led this market lower on the way down, they should be the first to turn if this market is going to head back up. Why? Because it will signify the RETURN OF INVESTMENT MONEY into this gold market.

Russell 2000 Bounces but Remains Weak

The Russell 2000, an index of smaller cap stocks, has been a pretty decent indicator of investors' sentiment towards the risk trade or the "improving global economy" trade.

It tended to outperform the broader market as stocks went on a maddening tear higher with the unleashing of the Fed's QE programs. Those combined with the ECB bond buying program in the Euro zone and now, the conjunction of the Bank of Japan's bond buying policy, had gotten investors in a tizzy to chase stocks higher no matter what the economic news was.

In a case of "Heads - I win" or "Tails - You lose" if the economic news was improving, stocks went higher on talk about the improving economy. If the economic news was bad, stocks went higher anyway because equity perma bulls could point to the lousy data as evidence that the QE programs would continue. Regardless, it was "BUY, BUY, and BUY"; no questions asked.

Suddenly, the bottom began to drop out of various commodity markets, most notably copper and of course gold and silver. But even crude oil and gasoline had been breaking down on their charts to the extent that the entire CCI, Continuous Commodity Complex has been swooning. There does come a point where even the most die hard stock bull has to start wondering how long his or her market can continue to levitate in the face of one piece of evidence after another that all is not well in La-La Land.

While we are seeing another miraculous recovery in stocks today, even as copper sinks further into bear market territory, that rally cannot hide the deterioration that is now solidly entrenched on the technical price charts.

Take a look at this Russell 2000 daily chart. It had fallen below the very important 50 day moving average early this month but managed to recover and rally back to near the recent high. Instead of attracting buying however, it began to attract selling. The result was a technical failure that has sent this index lower. This week, on Monday, the index broke firmly below the 50 day moving average again. After a feeble attempt at moving higher, it swooned on Wednesday and continued lower Thursday. Here, we are seeing what we have come to expect at this point on a Friday - the equity markets are miraculously saved from even more severe chart breakdowns just in the nick of time (PPT anyone?).

That being said, the index has now been trading below the 50 day moving average the entire week. The longer it stays below that average, the more likely it is going to break down further. I have noted two additional important moving averages, the 100 day and the 200 day. Notice that the horizontal support line I have shown in dotted red, come in exactly at the 100 day. That seems a logical target for this market at this point.

If this index falls below that level and cannot get back over it within the same week, I believe we are going to see a much more severe downdraft in the equity markets commence. What this will be telling us is that a growing number of stock investors will be turning bearish on equities even in the face of all this QE stimulus coming from both the Fed and the Bank of Japan. In other words, the investor world will be sending a signal that it no longer believes the bond buying programs are going to have any efficacy on creating any kind of serious growth!

Also note something that we have not seen in quite a while (early November of last year - remember when the "fiscal cliff" thing was all the rage), namely, the 50 day moving average is now turning lower. That bears watching.

Something else I have noted in my personal studies but will not post here is that the Homebuilders ETF, XHB, shows a chart pattern that is almost identical to this one. The same things that were said about the Russell 2000 apply to the XHB, it has been a strong performer to the upside as the housing sector has been seeing some signs of activity based on the availability of cheap mortgage money. If the housing market does roll over, this economy is in serious, and I mean serious trouble. I personally believe that this is what Dr. Copper has been forecasting.

This is the reason that I feel silver is having trouble even as gold has been showing good resiliency down here. The selling in copper is simply too much for the silver market (paper) right now as investors are selling base and industrial metals as they bet on slowing growth.

Today's Commitment of Traders report for copper shows the hedge funds still net short by a 2:1 margin. The report picked up the short covering among these big traders down below 3.25 on Monday and Tuesday but it did not catch the ferocious selling that hit this market the remainder of this week. My guess is that they went right back onto the short side in larger quantities again.