Gold bulls continue to say that the current pullback is merely a buying opportunity. I think they’re right in terms of the long term picture, but as a futures market analyst my current position is that a shorter term trade top has been made. How long the top stays in place remains to be seen. But I see it as being in place.

Last week I made mention that I thought a trading top in gold would be seen by late January. I was wrong as the trade top came in earlier.  Until prices get back over 1437, rallies look to be selling opportunities. At the same time, keep in mind that while I expect prices to remain under selling pressure, the overall price decline need not be very large. Let me explain.

I was hopeful that problems in the Eurocurrency would not move to the forefront until early February. That thinking proved wrong once the Swiss National Bank said just a day or so ago that it wasn’t going to continue to take Irish Bonds as trade collateral going forward. Portugal just held a 6-month debt auction that resulted in it having to pay sharply higher yields in order to sell its debt. While the bid to cover ratio was good, the interest rate paid to sell the debt seems too high given the austerity moves that need to be implemented.

When Spain moves to sell its debt the market will be watching. Possibly the issue will be put off if China steps in and buys debt a low enough yield to stop a problem from occurring. This is called “window dressing” and doesn’t stop the problem; it simply masks it for a while.

None of this is being lost on the Eurocurrency. It has resumed its trend down, which in turn is providing the Dollar with support. The higher Dollar is putting downward pressure on commodity prices, which includes pressuring gold, silver and copper prices. Gold can recover if traders “get it” and understand what is going on in Europe will ultimately cause in my opinion a move into gold as a reserve currency.

Gold at times moves inverse to the Dollar and at other times moves with the Dollar. This looks like one of those times where a rally in the Dollar has put selling pressure on gold.

Last, keep an eye on Friday’s employment number and how the markets react to it. Eventually lower unemployment will lead to higher inflation. When that mentality gets “traction” to it will be very important as that along with the European debt situation seems to me to be the two stories that will ultimately propel gold higher.

The key now is one of timing.

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.   

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.

The break in early January has occurred in past years. In bullish years, prices often drift to rally a bit according to MRCI. The 15 and 5-year pattern shows a rally in terms of momentum once this break runs its course, which begs the question as to whether or not 2011 will be a bullish year or not for gold.

Regardless of what occurs my thought is that nothing runs up without at some point taking a breather. Think of stairs. Each step has a landing pad. Prices often move up and down in stair like patterns.

I’ve displayed a Daily Chart of the February Gold contract below.

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 Swingline Study is shown as a “brown” line.

The Swingline Study on the daily chart just recently turned bullish, formulating a chart pattern of “higher highs and higher lows”.

As you can see from the Slow Stochastic (SSTO) reading, prices are now in oversold territory but the trend is down. Prices are under the 18-Day Day Moving Average of Closes, which means I expect resistance to come in on rallies near 1392.1.

Support is just under the market at 1359.8, the Bollinger Band Bottom.

What I expect to see is a rally that sets up a trading top that is much lower than the 1424.4 top now on the chart. Think of the stairs I mentioned at the beginning of this report. In essence a pattern of lower highs which is seen on this chart. The current pattern is one of a higher high and a lower low, which if you think about it is a descending bottom since the most recent action is that of a lower low.

In terms of chart action I label today’s chart action as that of an “Inside Day”. This created 1364.0 as a Swingline Low. This is part of the “stair pattern” I have been mentioning in this report. Now we need to see where the next trade top comes in. I expect it to be well under the 18-Day Moving Average of Closing Prices. If so, after it’s created and eventually broken the current downtrend will be negated. That doesn’t mean a new bull trend begins as market often go from bearish to neutral and than look to start a new pattern.

I don’t know what tomorrow will bring, but the odds favor that the week will end with a loss. If that is the case, the current week represent in term of the way I analyze charts an end to the current Bull Run in prices, since the pattern of higher lows will no longer exist.

Since prices remain over the 18-Week Moving Average of Closing Prices, my next downside objective is that number, 1352.7. Assuming I am right, what prices do there will determine in large part how I look at the next few weeks of trading.

As long as prices remain over this moving average, I would not get too aggressive about being bearish gold. If prices close under this moving average, 1263 could become a downside target. That is the Bollinger Band Bottom.

Look at the Weekly Slow Stochastic Study (SSTO). It is correcting being overbought and is now pointing down. This adds credence to the idea that upside momentum has been lost.

Gold is in an interesting place. Its lost $50 in value this week but in the process has become oversold and is approaching my initial downside target of $1360.

In looking back, there were some warning signals. While silver and copper added to their value in late December by challenging or making new contract highs, gold got stuck against the $1424 price level. This has resulted in some saying that gold now has a triple top in place, other saying that gold has a “head and shoulder” top, others saying that gold is now under key moving averages and so on. The key is that bearish news has taken stage. Just a month ago, everything was taken as being bullish. That’s no longer the case.

On the other side of things are the two issues that drove gold last year, sovereign debt and a falling Eurocurrency. Both of these issues are again taking center stage.

Finally, we have the “unemployment issue” as most call it back in focus. I think unemployment is going to fall this year back towards 9%. In other words people will be going back to work. As they do, inflation will pick up. Labor inflation is already being seen in goods coming in from China. How much pricing margin is left without the rising of prices remains to be seen, but I don’t think much is left.

Until a trend turns, it stays in place. Gold is now in a downtrend, but one that is already approaching it’s initially downside target. Can gold fall $100 or more from the $1437 level? Why not? However, an all out collapse in price given periphery problems is in my opinion not in the cards.

Let’s see how the market responds to Friday’s employment number. I will update my thoughts in my Twice Daily Update Reports.

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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 Friday, 7 January 2011 | Digg This Article