Do We Have a Breakout in Gold or not ?
Commodities / Gold & Silver 2009 Sep 19, 2009 - 05:26 AM GMTBy: Bill_Downey
Medium Term Gold Technical Analysis - With gold's entry into triple digits for a second week, investors are asking themselves, is this it? Is this the big one? What price will confirm we're going much higher? Will there be a pullback?
For those who are not chart readers, consider this. A doctor does not diagnose you by looking at you. He tests and looks at his charts for results. Based on those charts he determines how well you are.
This is a technical update of the medium term time frame for gold.
While the short term trend has been bullish since the beginning of September and while there's been a breakout in price on the daily charts, the weekly charts measure the medium term time frame and they have now arrived at their breakout area. The medium term is where the market focus goes from traders and early investors to the more "mainstream" participants. Just think about the fact that CHINA is advertising to the masses to invest in gold and silver. Can you imagine what that is doing to the markets? Initially, they have been rallying since the news hit. And they're doing it while the SHORT POSITIONS are at their highest. And it’s doing it with STRENGTH. Should the Chinese people embrace the metals, an explosion could develop. So, let’s get to it.
I've used the ETF symbol GLD so as to obtain volume characteristics. As of today's close GLD trades at around 100 when gold is at around 1020. I'm sure there are slight fluctuations to that range.
In order to understand what to look for in a major breakout and new up leg, we have 2007 as our guide and it’s right here on the chart below.
Here's what we need to see in order to confirm a major breakout is developing. Let’s look at it from top to bottom. Take a look at the rally from SEPT 07 to JAN 08. Look at that nice long rally. Now let’s see what the charts left for clues to see if GOLD exhibits the same characteristics this time.
1) 2007: The oval red circle on RSI at the top of the chart shows that in a real BULL MOVE, RSI can stay OVER 70 most of the time and can remain that way for the entire move.
NOW: RSI is only 3 points away from entering 70. While most think that's a sell signal -------it’s NOT during a major move. It would also mean that it’s still very early in this new rally.
2) 2007: The red arrow mid way down the chart shows the breakout in price above the dotted line channel. Notice there were no pullbacks, no chance to get on until price was 100 dollars higher in gold.
NOW: Everyone is waiting for a pullback. When I look at this chart, I ask myself, pullback to where? If price pulls back under the 950 area in gold or 93 in GLD......it will spoil the "Breakout" look. No, if this is the real deal............price should advance from here without a pullback under say 975 in gold and 95 in GLD. And even that is pushing it. If it does, something is wrong and gold is not ready to breakout.
3) 2007: The red line showing the volume increase during this bull move.
NOW: Volume, after dropping off all year, has suddenly expanded.
4) 2007: The oval red circle near the bottom of the chart on the Wm%R indicator shows that this indicator stayed OVERBOUGHT during the entire UP LEG in 2007.
NOW: Wm%R has entered the high 80% and while most are saying that gold is overbought, we know that it can stay overbought for a few hundred dollars higher as it did in 2007.
5) 2007: The red arrow at the bottom of the chart shows that MACD turned positive at the same time that all the above technical events happened.
NOW: MACD has turned up just as it did in 2007.
Now we have a map as to what was happening then. We can see that a lot of what was happening then is happening now. In fact.............it’s all happening. The markets always have "odds" if you look deeply. It would see the "odds" at this moment, is favoring the upside.
What else did we see that is worthwhile?
We saw that indicators can be OVERBOUGHT and as long as they stay overbought, the rally will continue. It is only when they come out of overbought range should we look to exit. Meanwhile, a lot of technicians will stay out of the market because their indicators are overbought. But we have seen that during a bull run, it should be EXPECTED.
We saw that VOLUME did expand..........we need to see the same.
WHAT NEXT?
Now gold needs to perform. It’s that simple. If this is the real deal, gold should continue to move up from here into the October time frame and then correct into the December/January period and have one final thrust into mid winter before next spring’s correction.
So from here on, we just continue to monitor gold's action.
WHAT'S FIRST?
Well, the indicators are all lined up saying their ready to go as they were in 2007. All that we need to do now is let gold prove itself. PRICE is reality. It must show us now.
We need to see gold move above the top channel (as it is attempting to do this week) and it needs to do it with CONVICTION. Ideally another 30-50 dollar thrust up over the next few weeks. The final resistance area near here is the 1035-1050 area. IT MUST BE EXCEEDED WITH CONVICTION.
If this rally is already underway, the 1060 and the 1130 area would be initial targets with potential for a spikes higher than that. As long as the indicators and price action that I've described continue in play, then the market should be readying for a good move forward.
LOOK for price to now remain above the 965-975 area. ANYTHING BELOW THAT suggests that this market is not yet ready for a breakout. If this is the "BIG MOVE" price has NO BUSINESS going back there.
It is no secret that 4 banks hold most of the shorts and that the COT is at all time highs. Does this make this risky? Sure. Where there is great reward there is great risk. There's no getting around that. So you have to minimize that risk if things start going the other way. It's part of the game. Should price drop below the area listed above, it will be time to evaluate the market again.
It’s in gold's hands now. And what it needs to do is EXCEED this final dotted channel line on the chart and begin to move higher and make NEW ALL TIME HIGHS. That’s what it needs to do here.
KEEP YOUR EYES ON THE NEXT TWO BARS COMING UP ON THE WEEKLY CHART to see if gold now confirms with a price move. So far the set-up is the same. The homework is done. Now it’s up to gold.
Bottom line: It has to move above the upper dotted channel line and do it with conviction.
If we think about it, gold has no business trading below 1000 (or at the worse, 965-975) is this is a “BREAKOUT.” Anytime gold is below 1000, be suspicious.
Let’s see what she does. And keep in mind, gold usually PULLS back in October.
At Goldtrends, we follow all the timeframes of the gold market right down to the hourly trend. We are currently monitoring the potential for a weekly medium term breakout. Gold has established the PRICE points at which the "odds" will tilt to the upside or the downside. If you like to follow along with us as we watch PRICE confirm when the next major trend begins, then drop by the website (where registration is not required) and check out ALL of the gold and silver analysis provided there for your review.
May you prosper
Bill
Bill Downey is an independent investor/ trader who has been involved with the study of the Gold and Silver markets since the mid 1980’s. He writes articles for public distribution for other newsletters and websites as well as his own free site at: http://www.goldtrends.net/
Email: Goldtrends@gmail.com
© Copyright Bill Downey 2009
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