Wednesday, December 31, 2008

Gold: Technical Update

When I last checked in on gold, I stated that the fundamental picture was obvious to everyone as central bankers were in a race to devalue their currencies. Gold soared on the Federal Reserve's commitment to do whatever it takes to solve the ills of the American economy.

In that article, I argued that the technical picture suggested a different scenario. The monthly chart had yet to break out; the weekly chart showed a series of lower highs and lower lows. Essentially, on the Fed news, gold had a strong bounce into resistance and into a downsloping 40 week or 10 month moving average. The technicals had yet to confirm a new bull market (by my methodology) in gold, and my conclusion at the end of the article was the following:

"While the price action has been strong and the fundamental story is plausible, the technicals suggest a pull back. For now and until confirmation of a monthly close over the trend line in figure 1 (or the simple 10 month moving average), this does not appear to be anything more than a strong bounce into resistance."

So as the month ends, let's revisit the technical picture in gold.

Figure 1 is a monthly chart of gold. The pull back that I have expected is occurring. Gold is unlikely to clear the down trending 10 month moving average (by the end of the month), but price is poking above the down sloping trend line formed by two consecutive pivots. This represents mixed price action for gold. The close below the 10 month moving average is still bearish, yet on the other hand, a close above the trend line (if it occurs) is bullish.{As I write this morning, gold remains weak leaving the end of month close in doubt.}

Figure 1. Gold/ monthly

Figure 2 is a weekly chart of gold showing the series of lower highs and higher lows. However, gold is in the process of making a higher high, and this is a positive.

Figure 2. Gold/ weekly

It is my belief that gold will pullback and then remount another assault on the 40 week or 10 month moving averages. It is also my belief that gold will be higher in 12 months than today. The price action is encouraging and longer term studies, such as the "next big thing" indicator, suggest that gold is setting up for a strong upside move. However, as we approach the end of the month, there has not been confirmation of a new bull market in gold.
Stay tune!

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