-- Posted Thursday, 19 November 2009 | | Source: GoldSeek.com
Overview
Gold was “the news maker of the week”, as new all time highs in gold were seen this week. As this took place news coverage of gold increased and advertisements for gold purchases are increasing. I am even hearing in my office about “Tupperware” type parties where people invite friends to their homes, the host purchases the guests gold jewelry for the gold price based on carat type. Most of us who follow gold know about the increased Central Bank purchases of gold that have taken place in India.
One of our Fed Governor’s floated the idea this week that the Fed may not be able to raise interest rates for a very long time. This statement had little impact on gold prices or the Dollar.
The Philadelphia Fed Manufacturing Survey came out this morning with a strong reading. Yet, at literally the same time of this announcement, it was announced that mortgage defaults increased by approximately 4 basis points and that the default rate in regular mortgages was approaching that of subprime ones.
Job growth is not taking place in America. Yes, job loss seems to be stabilizing, but even this is taking place at a lower rate than hoped for. What is worrying many is that without continued government stimulus, the economic recovery at best is extremely fragile. So fragile that some are calling for a double dip recession.
On the international front there is talk that UK bank defaults have not peaked and that some Japanese Banks will need to raise more capital. This attracted some Dollar buying, but not enough to turn the down trend at work in the Dollar.
Today it was reported by the World Gold Council that third quarter demand will be down 34%. India reported today that investment demand for gold is down 67% on the year while jewelry demand fell 42%. The impact was dismissed by some as being temporary.
What is taking place is that new all time higher prices take getting used to. This will take a bit of time.
Seasonal Story
Let’s begin this week’s report by taking a look at where prices look to me to be in relation to gold’s 35 and 15-Year Seasonal Chart. The chart below is provided by The Moore Research Center. The labeling as to where I think prices are on the chart is my own analysis.
You are invited to view information about the many services The Moore Research Center provides by going to their website at: http://www.mrci.com/
Seasonal charts are a roadmap. They provide an idea of what markets have done over different time frames. They have limitations in that the past does not guarantee what will happen in the future. In addition, different factors affect the same market over different time frames.
The Moore Research Center displays gold’s seasonal trend in two ways. Over a longer term 35-year period and a shorter term, 15-year period.
The 15-year period is displayed in red and is the pattern I think gold is following, which means I don’t expect as deep a setback in momentum as that seen over the 35-year period, but I do expect a setback.
Dollar Index vs. Gold
The Dollar has worked hard the past couple of weeks to find support near the 75.00 level. Last week I wrote about potential support and short covering in the 75.00 level. While this is occurring, the rally does not appear to be a trend changing event.
Weekly Gold Chart
Below is a gold chart displayed in a weekly format.
The graph at the bottom of the chart is the Slow Stochastic Indicator. As long as the green and red lines both stay over 80, momentum remains bullish.
I’ve labeled an area with a chart “gap”. Chart gaps are rare and are represented by the high of one bar and low of another. When they don’t touch there is a “gap”. Markets have a “way” of backing and filling to eliminate gaps, but they do occur. My hope is that prices pull back to fill this gap before moving higher. The higher prices go without filling the gap the more likely the gap will be filled sometime in the distant future when prices correct from even higher levels. I’d prefer, technically speaking, to see this gap filled now while the Stochastic reading stays as bullish as it now is.
Daily Gold Chart
The price action on the Daily Chart has recently been one of continually higher highs and higher lows. I have displayed each high and low over and under the Swingline Study apexes.
As you can see from the Swingline Study, the dark brown line displayed on the above chart, each rally high has succeeded in making a higher than each previous high and each break low has been higher than each previous break low. This is the classic definition of what I define a Bull Market to look like on a chart.
Next on the chart I add a couple of filters. One filter is the Slow Stochastic Indicator, shown at the bottom of the graph below. This filter measures; Overbought, Oversold and whether a market getting stronger within an entrenched trend. Gold has an entrenched uptrend as shown by the embedded Stochastic reading.
One of the other filters I use are Bollinger Bands. I use this filter to see if prices are trading outside of the Bands as 95% of the time prices will trade within its bands. In this case, prices are trading within them.
Review
Gold’s Seasonal Chart has historically displayed a loss of upside momentum in mid-November. We’re at the point where it either happens or not. The 15-year seasonal charts shows that the momentum loss has not lasted long. Historically speaking, the month of December tends to have upside momentum.
The Stochastic reading on Gold’s Weekly Chart is now in an embed state, with gold trading over the Bollinger Band Top.
The Daily Gold Chart has an embedded Stochastic reading with prices under the Bollinger Band Top. In fact, prices on the Daily Chart have been well contained by the Bollinger Band Top.
In an ideal situation the embedded Stochastic reading stays in place on both the Weekly and Daily Gold Charts, prices pull back a bit, prices stay over the Bollinger Top on the Weekly Chart, consolidate and move higher into the end of December.
Trade Recommendations
I am bullish and am recommending entering the February Gold 1200-1220 Vertical Call Spread.
I do not recommend establishing a position at but one price. Rather, my hope is to get part established on a small price pullback, ideally in the $3.50 price range and the rest a bit lower. The risk in the spread will be limited to the cost of the spread plus exchange and commission fees.
Outright purchases of futures contracts currently have a lot of risk. My preference is to use options unless I see risk levels I believe my customers can handle.
Ira’s Twice Daily Updates
The key to following my recommendation is through my Twice Daily Updates. I do my best in this Weekly Report to provide my trade thoughts, but nothing beats looking at the market daily to make adjustments.
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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.
-- Posted Thursday, 19 November 2009 | Digg This Article
| Source: GoldSeek.com
