-- Posted Thursday, 20 February 2003 | Digg This Article
The question on everyone's mind at the moment is, "Has the correction in the gold market ended, or is there still more to go before the bottom is reached?" Ultimately, the market itself must answer this question, but we can glean some clues as to gold's possible near-term direction by a close look at the chart. The most prominent feature of the gold futures daily chart is the parabolic bowl that has lately developed in the April contract. The rim of this bowl was tested on Tuesday (Feb. 18) when gold fell to a low of approximately $344 before bouncing back on Wednesday and Thursday, during which time gold climbed to $355.
You'll notice how the April Gold daily chart has been marked in equal sections of horizontal lines. The first line at the bottom of the chart (at approximately the $300 level) is the starting point, since it represents the major breakout level in gold and also "psychological" support. The next horizontal dashed line is at $330, the second major pivot above $300, and the third horizontal dashed line is at $360. You'll note that these lines are at $30 increments and each section is perfectly equal in price. In the parlance of technical analysis this is known as "price equilibrium" and is concept of the great P.Q. Wall and practiced by yours truly.
What is truly fascinating about these $30 equilibrium levels in the gold market is that they almost perfectly forecast the recent move up to $390 (which if reached would have been a perfect equilibrium move). Gold futures stopped just short of this mark, peaking at $385 earlier this month. This demonstrates the nature of price movements in actively traded markets such as gold and also confirms the validity of technical analysis. Specifically, it shows that prices move in equal increments over time and nearly always seek well-defined pivotal levels on their way up or down.
Within each $30 section a further division can be made at the halfway mark, i.e., at every $15 increment. Thus there is drawn horizontal blue lines at roughly $315 (the halfway mark between $300-$330), $345, and $375. It's uncanny how prices tend to react around these levels, almost as if on cue. The most pertinent price equilibrium levels for April Gold right now is the blue line intersecting $345 and the dashed line overhead at $360.
My interpretation of gold's current position between these two levels is that resistance is likely to be encountered around $360-$361. On the other side of the coin, support needs to be found above $345-$346 in order for gold to stay technically strong. Have we seen the last of gold's near-term declines for this cycle? In my opinion, not likely. This is because the parabolic bowl in the gold daily chart (above) has not reached bottom yet, and the parameters of this bowl (assuming it has been drawn correctly, which I have every reason to believe it has) show the "vertex," or mid-point, at $340. Thus, gold has downside potential all the way down to $340 in the event $345-$346 fail to act as support. And if $340 fails to hold? Then it's down to $330-$331, where our second price equilibrium level is. Also worth pointing out is the 30-week uptrend line that currently intersects $330.
Clif Droke is the editor of the Gold Strategies Review newsletter, a monthly forecast and analysis of gold and silver futures and precious metals stocks. He is also the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com
-- Posted Thursday, 20 February 2003 | Digg This Article
