-- Posted Sunday, 5 April 2009 | | Source: GoldSeek.com
After nearing the record high from March 2008 - which coincides with the upper channel line (in orange) - gold entered a correction. As previously stated, we expected that gold would meet significant resistance at this level, and a correction back to support in the range from around $855 down to the weekly record close from 1980 at $823 appears likely before a final breakout above $1000 / $1033.90 potentially takes place. If the correction, as is usually the case, has a second leg down similar in size to the first leg down from $1007, gold will soon enter our anticipated target range.
This would constitute a normal correction of about 50% of gold's move up from its October 2008 low. If gold has a weekly close one percent or more below $823, a retest of the $681 low or a touch of the lower channel line (in orange) may take place.
U.S. and World equity markets are in multi-year downtrends. At present, the current rally has carried up near our anticipated target of 850 for the S&P 500. Given the strength shown in several sectors, the market may run up to test the 930-945 range on a weekly close at 860 or higher.
If the current bounce fizzles without breaking through the 800-850 range, the most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.
For the S&P 500 (chart below), note the significance of the 200 day (43 week) moving average. It tends to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market), and is currently located at 979, rapidly declining further into the 930-980 resistance range. The plausibility of breaking 980 any time in the next several months has significantly diminished now that the 200 day (43 week) moving average has fallen so far.
Once the market hits a final bottom, all the moving averages are eventually certain to be broken through to the upside, but that may be another year or more away from happening. For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak). During the 1929 to 1932 market collapse, the Dow Industrial Average took 34 months to hit bottom (down 89% from the peak). So far, the S&P is only 17 months into its current bear market.
When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to see - at the very least - a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting several years.
More than anything, the longer-term outcome may depend on the future world energy situation. Will there be sufficient crude oil and natural gas production? Will (and can?) alternative energy sources be scaled up quickly enough to compensate for potentially declining world oil and gas production? For now, the start of any kind of bull market (and not just a multi-week or multi-month bounce) is likely well into the future, but these questions will quickly take center stage when the world economy attempts to resume its growth. The level of the oil price - measured both in terms of paper currency and in ounces of gold - will likely be the single most important factor with regard to the future of the world economy.
Crude oil may have bottomed. However, if the very important long-term $40-$37 support range later gives way in convincing fashion, the next important area of support is all the way down at $26-$25. Also, the $40-$37 range would likely turn into a significant upside resistance should such a breakdown take place.
Conversely, if oil breaks back up through the $53-$56 area, the bottom is likely in. The next important resistance areas would then be $68-$70 followed by $78-$80.
We stated last week that crude oil has pulled back from anticipated resistance in the $53-$56 area, and that we would consider going long oil either through the futures market or the corresponding level for the USO oil ETF on a correction in oil to around $47. Oil pulled back to $47.26 before reversing higher, but remains trapped in the large $37 to $56 range until a weekly close at $57 or higher takes place. If oil has another short-term correction, it may find support between $47.50 and $45.
Until next weekend, have a very good week. Always remember that proper risk management is essential - and even more so during volatile markets.
All the best,
Christian Normann
dr.normann@post.harvard.edu
www.normannfinancial.com For the complete weekly analysis including additional and larger charts, please click here
Dr. Normann is a graduate of both Harvard University and Florida Atlantic University, with one of his degrees in Finance (summa cum laude).
Previously, he was a financial advisor with Morgan Stanley Dean Witter, but left ten years ago because he wanted the freedom to do completely independent research and focus on perfecting his own trading style and investment skills.
He first entered the financial markets in 1995, trading currencies for his own and his family's accounts. Later, he expanded into equity, commodity, futures, and bond investment and trading, and has extensively studied the history of financial markets going back to their origin centuries ago (covering multiple extraordinary mania periods and subsequent busts).
Please visit the About Normann Financial page for important information about risk management and position sizing. We provide analysis in good faith and to the best of our ability, but all information on the Normann Financial website is provided solely for educational purposes and does not constitute investment advice. Learning to operate successfully in the financial markets is not easy - it takes a substantial amount of time, effort, and discipline. Your trading and investment decisions are exclusively your own responsibility. Proper risk management is crucial.
-- Posted Sunday, 5 April 2009 | Digg This Article
| Source: GoldSeek.com
