Yesterday saw a shakeout in a number of commodity markets due in large part to China announcing it was tightening both its short term one-year lending and deposit rates. China hasn’t touched these particular rates in 3 or so years.

At first the financial markets seemed to interpret this action to mean that China was acting to slow down internal economic growth, slow down an economic real estate bubble and fight inflation. So much has been built into what China does or doesn’t do that anything they do is a market moving event.

I wrote in my Twice Daily Update last night that I thought the Chinese move was more a political move than anything else, a move that unless followed up with other rates hikes soon would not be overly significant. I base my conclusion on the upcoming G-20 meeting where China was about to walk into the “lions den”, with Europe, the USA and Japan ready to denounce China’s handling of its currency’s strength. By taking the action China did, China turned the table. Now it’s the US, England and Japan that may be on the receiving end of Chinese criticism as China can now argue that any quantitative easing by the US, England or Japan is a currency play to lower their currency values at China’s expense. It’s looking more and more like we’re involved in an interesting game of chess.

Yesterday’s setback in price offered a glimpse of what could happen if China were to turn off the growth spigot. It also brought to the forefront that in uncertain times, investors are quick to dump riskier asset plays and move back to the Dollar.

Overall, gold, silver and copper held up well yesterday. Silver in relative terms got hit the worst. That’s probably because the market at first feared a slowdown in raw material needs. Silver at $25 an ounce is still a raw material, as is copper. Gold is different in that gold is a quasi currency and raw material.

Today’s rally back in metals is important as you’ll see the break and rally off the break are taking place against its 18-Day Moving Average of Closing Prices. You’ll also see that upside momentum for the time being has turned down, which means price rallies a missing internal upside momentum. The Slow Stochastic Study is now working off an overbought condition.

Before we get too far, let’s start by looking at where prices are in terms of seasonal momentum.

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.   

As I mentioned in the past report, Gold is not bucking its historical pattern. Look at the seasonal chart below. Prices spiked into mid month and have been falling back.    

I use charts like to this get an idea of timing. Until I see a change in pattern, I think the bull pattern is what is at work. Past price breaks, whether they come off the 5-15 or 30-year pattern have all shown a tendency for prices to setback at this time of month and resume upside momentum around November 1^st.

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.

Prices had been trading over the 18-Day Moving Average of Closes since early August until October 19, when they closed it. Today prices are trading back over this moving average.

The Swingline Study saw its previous low broken, which mean the chart patter is one of a higher high and lower low. When prices are over the 18-Day Moving Average of Closes, as they are now and the Swingline Study is pointing down, I call the trend is neutral.

As readers of my reports know, I do look at seasonal charts for an idea of what past time frames have offered in the past. The current chart pattern as provided by Moore Research Center had me looking for a mid October price break. The current sell off qualifies this break as the one I was looking for.

All that prices have been able to do so far is get back down to the key 18-Day Moving Average of Closing Prices. Whether there is another down leg remains to be seen, but if one occurs I wouldn’t expect it to drop much beyond the Bollinger Band Bottom.

In terms of momentum, the Slow Stochastic Study has turned down. It lost its embedded reading on October 19^th, when prices fell down to the 18-Day Moving Average of Closes. The current reading of this study is showing prices as overbought and internal momentum fighting today’s gain in prices.

Last week I wrote about my thought that prices move in approximate $25 increments. Think of 1300, 1325, 1350 and 1375 as examples of $25 increments. December Gold briefly touched $1388, about mid but so far has not closed over $1377.1. Since the high gold has pulled back nearly $60 an ounce to 1328.4.

It would not surprise me to be saying “get long” as soon as Stochastics correct a bit more and the Swingline Study turns back up. In terms of timing, if the market pays attention to past historical momentum, that event should occur before month’s end, when the markets will be focusing on the November elections.

Those that want to use the current price break to build a long position could begin doing so now, from current price levels, if they are willing to consider an option strategy against their long futures position to offer some price protection. The longer term weekly charts have not turned down, so given the pullback under the Bollinger Band Top on the weekly chart; I envision longer term traders using the current price break to establishing a bullish position.

For those that want to simply buy gold without option protection, I’d wait for a chart setup where the indicators come together. I will notify of that to subscribers of my twice daily updates in my written and oral updates.

My expectation is for this to occur sooner rather than later.

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, 20 October 2010 | Digg This Article