“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Saturday, November 15, 2014

Weekly View of Gold

Here is a quick look at the intermediate term chart of gold.

There are several things that stand out to me as I survey this chart.

Let's start with the various phases. I have delineated these with the variously colored shaded rectangles for your convenience.

I think the chart speaks for itself.



The peak above $1900 in September 2011, was the climax of the then bull market. Subsequent to that, the market entered what can now be clearly seen as a transition phase. However at that time, we as technicians were unclear as to whether the great bull was finished or was merely taking a rest, gathering itself for another rampage higher.

This transition phase, or consolidation, occurred over a period of 15 months in which the price was essentially range bound. The top of the range that formed was $1800 and the bottom was $1530-$1525.



There is something interesting about this range which we can see clearly in retrospect. The $1800 ceiling was a triple top just as the $1530-$1525 level was a triple bottom. The old trading adage that "triple tops or triple bottoms rarely hold" turned out to be true, but not for the upside. The reason for that is because the US Dollar bottomed out near 79 (USDX) that very same month ( October 2012). As it rallied, any hope for gold taking out $1800 was dead.

In April 2013, gold officially entered its current bear market with a clean break to the downside of that broad range trade defined during the Transition Phase. We remain in that bear as of this weekend.

Please note that gold throughout the bear that has unfolded, gold was demonstrated all the classic signs commensurate with bear markets, namely a series of LOWER highs, with the exception of a horizontal support zone that had formed near $1180.



Unlike the previous trading range where the highs were at the same level ($1800) and the lows at the same level, ( $1530-$1525), the current state has shown us that very good buying has been present down at the $1180 level. So much so that once again, another Triple bottom had formed there.

The market clearly violated that level three weeks ago but has since then not seen much in the way of additional downside follow through. That is evidencing a reluctance to extend the break lower at this time. Normally, when one sees a clean break either ABOVE or BELOW a broad consolidation range, in order to validate it, good technicians like to see three things: First - a move OUTSIDE THE RANGE of 2% or more; Secondly, - strong follow through, and Thirdly - SUCCESSIVE strong downside closes.

In the case of the first requirement, a 2% move below $1180 means price would need to drop another $24 to confirm the breakout. That it did with the market easily falling past $1156.

On the second point - we also got the strong downside follow through the previous week with the price moving as low as $1130. That is a 4% move below the $1180 level.



However, and this to me seems to be the key ingredient that it thus far missing - the all important WEEKLY CLOSES have yet to confirm a 2% move down. In other words, from the perspective of a technician looking to confirm the downside breakout of the triple bottom at $1180, gold would need to sustain a WEEKLY CLOSE BELOW $1156 to confirm a new leg lower.

As you can see from the chart, it clearly has not done that. The week immediately following the downside support breach put in a close at $1169.80. That was well above the 2% threshold. This Friday's close was actually ABOVE the $1180 level, coming in at $1185.60. Thus, as of now, we have not gotten CONFIRMATION that the downside breach of $1180 is valid as far as setting up another leg lower.

By the way, can I just make a quick comment here - any of those pestilential gold newsletter writers who are always bullish gold no matter what, and who state that gold is in a bull market, are not worth being paid a  single dime. Any supposed 'technician' who cannot get something this evident correct is rather frightening in their ignorance. Gold has been a bear for almost 20 months how. Save your money and spend it on something more productive than keeping such misleading writers in  the business of producing such nonsense.

Now that we have covered this, let's come back to something I stated a while back in a previous post. Throughout the entirety of this bear market, there has been countertrend rallies, which have provided opportunities for those traders who are very short term oriented to profit from by playing from the long side of the market. The caveat I added was that they need to be very quick on the drawn however as the rallies have all tended to end with rather sharp downside moves meaning that most of the profits from such trades can be lost unless a trader has been nimble and fleet of foot.



Take a look at this chart in its entirety and note the BLUE ARROWS. I placed them below what we technicians refer to as "Spike Bottoms". Notice also that in ALL THREE PHASES of the gold market, BULLISH, TRANSITION, and BEARISH, these spike bottoms are present. What does this tell us? Simple - gold has a tendency to put in spike bottoms when it reverses direction.

Traders who understand this particular "quirk" of gold's personality can take advantage of that. These are signs that the market has been sold out temporarily. Notice that after each and every one of these blue arrows, the price has rallied. During the current bearish phase, it has provided traders with both the opportunity to make a long side bet as well as eventually finding a higher level from which to reenter on the short side. Remember, the trend is down until proven otherwise but one can always place short term trades while positioning also in the direction of the prevailing trend at key technically significant levels.

Please note that I have also drawn in a RESISTANCE ZONE on this chart which bulls might possibly be able to reach if this Friday's rally turns out to be more than another of those one day wonders. It comes in near $1240 on the chart and is shown by the blue rectangle. That level served to hold the market back in May of this year when it fell to that point and then rallied $100 up to $1340 before failing. However, it gave way most convincingly in September this year, was briefly violated in a short term countertrend rally but the price could not CLOSE above it. It should thus now serve as an upside cap on any subsequent move higher in price. If the market does manage to put in a WEEKLY CLOSE of any significance above $1240, it would decidedly change the complexion of the price chart. One would then have to give some real credence to a solid bottom being in for gold. Only time will tell us however whether or not this is the case. Anything prior to that is pure GUESSING.


Lastly, let me leave you with a LONG TERM MONTHLY chart of gold.




Clearly gold has lost long term trendline support on the monthly chart confirming the current bear. It is however finding some support in the confluence of the zone I have noted. The Fibonacci retracement level of the rally from the 2008 to the 2011 top is $1152. It fell through that level but was able to recover. That is a positive sign.

However it still remains BELOW both trend line and has yet to exceed the previous month high of $1255.60. To give some bullish credence to this otherwise dour looking chart, the metal would at a bare minimum need to exceed that point to get technicians a bit more upbeat on its prospects.

A MONTHLY CLOSE ABOVE $1340 would be necessary to give even more confidence that something more important is afoot.

As stated many times here, and which needs to be repeated - There seems to be a mistaken impression among many people that markets that are going down will bottom and then launch into a bull market with little or no warning. The reverse also seems to be another just-as-frequently mistaken view, that a market which has been going up, will stop going up, reverse and then enter a bear market.

In some cases, notably in the grains, this can be occasionally true due to unpredictable weather driven events. But more often than not, there are TRANSITION PHASES, as I have detailed above, that will occur. These are periods of sideways trade during which a market will move up and down, back and forth, for many months at a time, generally going nowhere outside of the range. Gold may very well be going back to a pattern like that. Or it may not; it could be forming a temporary respite from the selling before making a new leg lower. Or it could be ready to move past $1340 and start something more exciting.

The simple truth is that there is not a single human being on this planet who really knows. We all have our ideas and opinions, but that is exactly what they are, ideas and opinions. Until we get some sort of confirmation any dogmatically asserted opinions, no matter how often that they are repeated, are just people looking for attention as they make their guesses. Don't fall for that.

The market will tell us what it wants to do when it is good and ready to do so. Our business as traders is attempting to ferret out exactly what that voice might be saying.






29 comments:

  1. ON posted and interesting Seeking Alpha article on an earlier thread.

    There does seem to be a strong inverse correlation between the Yen and Gold in dollar terms. I doubt it's actually cause and effect though. May be more a reflection of the other factors drubbing Yen and supporting Dollar.
    Worth looking at the charts but not buying all the authors conclusions.

    Thanks for poising.

    ReplyDelete
    Replies
    1. Dang small screen. That was Ophelia Ball's posting and it was thanks for posting.

      Delete
    2. Could be the "risk on" versus "risk off" affect. It seems odd that the relationship would indeed be causational - and we have to be careful with correlations. Merely using correlation would have you conclude odd things, such as the number of Women lawyers over time is causing more autism in children.

      Delete
  2. Top notch analysis.

    Thanks Dan. Have a great weekend

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    1. Pretty outstanding stuff and a nice surprise on a Saturday, thanks!

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  3. Hey Dan , why no comment on UBS gold rigging settlement ?
    Don't you think this could have an effect on the charts?
    I'm sure you have heard the old saying " garbage in - garbage out " before.

    Tin Pan

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    Replies
    1. tinpanminer;

      I have commented on it already. You must have missed my posts and responses to posts...

      http://traderdannorcini.blogspot.com/2014/11/another-eureka-moment-for-gold-bugs.html

      Delete
  4. Excellent and thorough. I wish I would meet you earlier. Back to that time, I loved to short gold but my mentor Larry Williams suggested otherwise. Yes the truth was Commercial buying gold but gold kept going all the way down. If you traded based on Commercials you would be broke now. I told him something wrong with his reading of COT reports which now categorizes the class of people more in details. But he not listened. I glad to have your blog to help me to learn much

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  5. I think that is a truly excellent and thorough analysis Dan; as you mentioned in the title of a recent article, the past 10 days have been largely sentiment and runninf-out-of-steam driven, because compared to the events we have witnessed earlier this year, nothing substantial has occurred either globally

    We remain hostage to "events" - though unless I have misses something, the G20 meeting appears to be turning out to be a damp squib

    My sense is that the past fortnight has been a brief blip in the chart rather than a significant turnaround

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  6. is this legit?

    http://www.globalresearch.ca/scandal-last-seconds-of-mh17-flight-were-snapshot-by-a-us-or-uk-spy-satellite/5414148

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    1. Interesting link OB.
      I think anything's possible and it wouldn't take much for Russia or the US to fabricate some type of photographic evidence against

      My guess is that some drunken "rebel" or Russian soldier in E. Ukraine fired a rocket at what they thought was a Ukrainian transport plane or fighter jet at a high altitude.

      I guess it could just as easily have been a Ukrainian fighter jet attack/false flag type of thing. Crazy stuff either way.

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  7. I was thinking about 2013. That year had two events where gold dropped very hard.

    The first was April 2013 when gold broke below $1500. I do not know what triggered it, but someone it the sell button on a lot of gold as it became apparent that it was going to break support.

    The second event was in June 2013. Gold had worked its way back up to ~$1400 and actually stabilized. Then out of the blue Bernanke came out and said they would soon begin tapering QE. This caused the rates to mega sky rocket and gold subsequently fell to $1200 over a ~7-day span. It was this surprising event that triggered the major selloff. The trigger caused the 10-yr rates to sky rocket from around ~2.0% all the way up to ~2.7% - and they eventually climbed to 3.0% in December.

    So, my educated guess regarding gold’s destiny lower is based on two primary things; 1. A major increase in the 10-yr rates; 2. A surprise trigger that sends the rates higher.

    In other words, it needs higher rates – but also has to be surprised with a Fed announcement that they are raising rates. We have focused on disinflation or deflation around the world – but this alone may not be enough to cause a quick selloff in gold. This will likely only cause a slow torturous decline as depicted on a chart that shows a support line running from $1200 in June 2013 to ~$1130 November 2014 AND the top of the channel running from ~$1450 in May 2013 to ~$1380 in March 2014 .

    I also think the run up in the DXY has run its course and is now way over-bought. It needs more than mere actions from foreign central banks to go further up. It may also need monetary tightening from here at home in the US Fed to go further above 88. SO, I think it could pull back to maybe 85 or 86 before climbing higher again next year. AND – even though 85 is still strong, it could be weak enough to allow gold the opportunity to rally one last time before any major selloff – assuming rates get raised.

    I think Gold can eventually go to $1K – it’s possible. When the Fed announces that they are raising rates sometime between Jan 2015 and Sep 2015 -- gold may sell off hard – if it comes as a surprise. And it might even fall all the way to $850. The DXY could rally to as high as 110 because of the relative rates between the US and other major central banks.

    In the mean time, my guess is that gold will likely go to ~$1250, then maybe ~$1330. Next few weeks will be very telling.

    ReplyDelete
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    1. 1250 to 1330 would be a dream come true for me to unload some coins that should have been unloaded a while back.

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    2. Great stuff EW.
      I think you're right about the next few weeks telling the tale. If we don't get a year end/seasonal bump after this long grinding downwards pressure it doesn't bode well I think for the metals going forward. We'll just continue to grind agonizingly lower at a slow rate until we get close to $1000.

      I think the DXY is bound to pull back also but nothing crazy. I do wonder though what part the yen might play in all of this.
      If the yen continues to steadily weaken then the effect on the USD might be enough to keep it stronger longer and faster then I thought possible.

      We're in uncharted territory with the amount of liquidity that's been pumped into the system these last several years.
      It's kind of mind-blowing to think that the FX market has activity to the tune of over $5 TRILLION each day.

      No wonder we're experiencing some incredible swings at times.

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    3. I think the DXY is primarily dependent on the EUR/USD. It doesn't appear the ECB will be doing anything until 1st quarter of 2015. Much of the sell off in the EUR was anticipation that the ECB would begin a US-style QE program. Well, doesn't look like this will occur anytime soon. So, while the ECB agonizes over what it can do to kick in Euro area economic growth, the Euro may rally, while the dollar falls. I think the USD/JPY is likely to climb to ~120 over coming months. But, the Yen plays a somewhat minor role in the DXY. The components of the DXY Index are (by weighting): Euro (57.6%), Japanese Yen (13.6%), Great Britain- Pounds Sterling (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and Swiss Franc (3.6%). Because of the composition of the DXY, it is sometimes referred to as the Anti-Euro Index. So, the DXY is in large part dependent on the US versus the Eurozone -- and so this also in large part holds the future of gold. Much will probably come down to the relative rates between the two - where the US dollar is likely to hold a major advantage heading into next few years.

      I personally believe that long term, the US is very bullish against the Eurozone area, as America becomes an energy superpower, and subsequently steals manufacturing back away from China.


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    4. If rates were to rise that wouldn't necessarily be bearish for gold. In fact, since money is already herded into bonds net flows would probably be out of bonds due to capital losses. This money would flow to real assets making CPI rise faster than bond yields or more importantly the expectation of bond yields not compensating for future increases in the general price level would really make gold attractive. Additionally if rates were to rise then the debt trap would worsen. Interest expenses would exceed any growth in nominal incomes thereby putting default on the market's scope. Then no interest rate no matter how high will attract anybody but vulture funds.

      There is a perspective that all this QE actually retarded the gold bull. The QE kept the debt container full, kept it from tipping over, kept capital gains in bonds intact.

      Delete
  8. This is a bear trap. You can also draw a slightly downward trending line and gold is still under consolidation for the weekly chart. Too many people looking at that broken level of support thinking we will drop to 800-900. That trade is too crowded. Bears will need to feel a lot more pain and bulls will need to become more confident for this to crash.

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    1. Greenlander;

      the trend is lower until proven otherwise. Also, I am note sure where you are deriving your information from as to the trade being "crowded" I am assuming you are talking about the positioning of traders in the gold market.

      All of the big spec categories are NET LONG, not net short, so where you are getting the idea of a "crowded bearish trade" is rather odd to say the least.

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    2. If greenlander thinks we may go up a little from here and see 900$ in q3 2015 I think he may be right.

      If he thinks its a shortsqueeze "to and through 3500" to 50.000 gold eventually I know which "technician" he is reading.

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    3. A serious bear trap...

      http://hutzeltraps.com/large_bear_traps/lgbear3.JPG


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  9. thanks for your insights Dan u r really apprieciated... I have a question for u...I hope u have time to answer...ive heard u and others state that gold miners lead gold in direction so im curious with tax loss selling coming and for all I know already started do u see a possible repat of last years dec bottom ???

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  10. Dan - I'm not sure if you noticed, but both last friday (11/7/14) and this friday (11/14/14) the COMEX GC open interest actually increased on the big up moves in price. On 11/7 it was a huge increase, and yesterday it was an increase of roughly 6k contracts (in the preliminary report)

    I mention this only because it throws some water on the "short covering" explanation - as you know, short covering will result in flat or decreasing OI, depending on who the shorts are buying from.

    Somehow, though, i don't expect to see anyone on KWN ranting about MASSIVE UNBACKED PAPER CONTRACTS BEING BOUGHT TO MANIPULATE GOLD HIGHER....

    ReplyDelete
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    1. Hmm, suggestive that the price *might* have further to climb....then

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    2. Kid did you have a link for open interest?
      Thx

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    3. open interest found here, on Page 62:

      http://www.cmegroup.com/market-data/daily-bulletin.html

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  11. Thanks for the very interesting and insightful analysis. From what I've experienced from being a long time member of your site, you provide more, and my opinion, more useful information than most subscription sites. Thank you for being so generous with your time.

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  12. most xlnt commentary Dan!
    (Bill & Ted's Excellent Adventure 1989)

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  13. Dan

    Plenty enough commentary has been said from both bullish and bearish camps. Christmas would be a good time to re-review where gold is and whether its meanderings from 1900 to present levels were just a correction or the continuation of a bear market. I will just pray that all works out well for every participant on this blog! And thank you again for your insightful commentary!

    JM

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