The FOMC Meeting minutes released yesterday implied again that the Fed would provide added stimulus to the markets, when and if needed. While no time frame was provided the minutes in my opinion put the markets on notice that more help would be forthcoming….if and when needed.

The impact of this has not been lost on the currency markets as the Dollar Index continues to fall. At the same time, Japanese officials continue to threaten intervention while China says the Yuan is rising at a controlled pace. The Eurocurrency continues to remain in a bullish pattern as ECB governors continue to release statements that tightening is what the Eurozone needs. Last, the Bank of England stands ready to offer a stimulus package, when and if needed.

Investors are clearly not worried as they were this summer over sovereign debt issues. In fact, investors have been moving to much riskier investments as though don’t seem as enamored with US treasuries as they did just a week ago. Yesterday’s three year auction results showed a bid to cover ratio that was down sharply from the last auction’s results.

The stock market and hard asset plays are in favor which benefits gold and has helped to contain setbacks on profit taking sprees. As a market technician, I think yesterday’s low of 1341.4 is of high importance. If it were to be broken, I could make an argument for a correction down to the $1300 to $1325 level.

With the passing of yesterday’s release of FOMC minutes, I think that gold’s focus will now shift to the Dollar Index’s day to day swings, at least until the next FOMC meeting. Simply put, price breaks in the Dollar should offer gold with reason to rally while rallies in the Dollar should provide the market with profit taking sprees.

Take a look at the chart below to see the inverse relationship currently at work. This is a Line Chart comprised of closing prices, not highs and lows as Bar Charts show.  Closing prices as of publication time are at an extreme since mid August.

Below is a Seasonal Chart of Gold prices produced and provided by Moore Research Center, Inc, (www.mrci.com). I’ve been writing about gold’s historical tendencies for a long time.   

Gold is not yet bucking its historical pattern. Look at the seasonal chart below. Prices often spike into mid month, which has been occurring. Given today is the October 13^th, this rally fits in very well.   

If prices see some profit taking later this month, I would welcome it as a buying opportunity since that would fit in nicely with historical pattern shown below.

For those of you that wish to learn more about seasonal historical studies, visit the Moore Research Center and sign up for their 14-day free trial.

Below is a Daily Chart of December Gold. Each individual bar on the chart represents one day of trading. In “red” I have plotted the 18-Day Moving Average of Closing Prices, in “dark blue” the Swingline Study and the “black dashed line” is the Bollinger Band Study.

The dark blue line on the chart is the Swingline Study. This is a technical tool I developed to help me define what the current trend is of a market is and to provide an idea of financial risk to the last high or low, depending on whether the market is in an up or downtrend.

On October 7^th gold had what is commonly called a “key reversal day down”. That means that both a higher high and lower low were made along with a close that was lower than the previous day’s closing price.  

Prices have been trading over the 18-Day Moving Average of Closes since early August. As I teach in my charting course, when prices are over this moving average, chartists should only be looking to establish new long positions or taking profits on long positions. Chartists should not be looking to go short when prices are over this key moving average.  

In last week’s report I also made mention that until prices got over October 7ths high of 1366, sideways to lower prices were likely. That occurred until today when prices got over 1366 and quickly moved up to 1375.

Last week the Slow Stochastic study lost its embedded reading on October 8^th, only to regain the embedded status by the close of trading the very next trading day. When Slow Stochastics moved from embedded to non-embedded and back to embedded in but two trading days. I term this event a “Bear Momentum Trap” due to the swings in change of momentum.

The Swingline Study never lost its pattern of “higher highs and higher lows”, which is the classic definition of a bullish chart pattern. The current chart pattern would now require a move under 1341.40 to break this chart pattern. In my last report this number was 1313.30.

Look at where the Bollinger Band Top comes in today. 1372.7. I think this is the resistance level. Resistance is not a sell sale level but it is a level where I teach chartists to lighten up on long positions, looking to re-establish at price levels away from the Bollinger Band Top, assuming the other indicators stay bullish.

This morning prices moved up another $25 increment. What I mean by this is that I believe gold moves in increments of $25. Think of 1300, 1325, 1350 and 1375 as examples of $25 increments.

The early morning surge caused prices to hit the Bollinger Band Top, which I term a resistance point. Past history shows that if a short term trading develops it forms in mid October. Past history has limitations, so I look at it but don’t recommend trading off it. Rather, keep it in mind. If you are long, some profit taking might be in order.

I am looking for a new buy recommendation to develop. Should prices start breaking down, the break could be swift and over before you know it, given the current set of bullish fundamentals.

Therefore, I think it important you be ready to get long on the next down swing.

The new 10-ounce gold contract is coming along. Prices do track the large 100 and 33-ounce contracts. Trading volume looks light, but the bid offer is tightening up and approaching that of the 33-ounce contracts bid offer. Over time, this should prove to be an important trading tool given that margins on gold contracts go up as prices go up and the smaller contract offers a lower margin than the other contacts. Yes, you will own less gold, but smaller may prove to be an advantage for some.

The key to keeping up with my trade recommendations is through my Twice Daily Written and Oral Updates. That is where I put out specific trade recommendations covering all the markets I cover with twice daily updates to them. I rarely put out specific recommendation in this Gold Report since it’s easier to use my Twice Daily Updates than this report which is limited to but once a week.

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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. Chart data is courtesy of LGP-IraCharts. 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 not indicative of future performance.

-- Posted Wednesday, 13 October 2010 | Digg This Article