This is an important time as come September, a lot of market moving events are taking place.

In September:

• Moody’s will conclude a review of Spanish sovereign debt rating, which will most likely result in another downgrade of Spain’s credit rating
• Spain will announce the results of bank stress tests
• On September 6^th the ECB meets. Given that Mario Draghi skipped the Jackson Hole meeting along with other heads of the European Central Bank a lot is expected. Talk is that a 25 basis point cut will be seen along with a negative deposit rate
• On September 12^th the German Constitutional Court rules on the legality of German funding of the ESM. If approved, as many think it will be, the first installment of the capital to be paid to ESM members has to be paid with 15 days of the ESM treaty entering force.  It takes 90% of the subscribed capital to be approved for the ESM to kick in. Germany and France have veto power, so the court ruling in Germany is a do or die situation as Germany is the “wild card”
• The FOMC Meeting takes place

Last, demand from India is expected to pick up as the marriage season kicks in. While India’s demand is not expected to be as stellar as it was in the past due to new taxes put on gold by India, central bank demand around the world has and is continuing to make up a large amount of the difference. In addition, it doesn’t hurt the psychology of the market to have the US Republican Party talk about a return to the gold standard.

So, it seems to me pretty clear that September is going to offer the markets with a series of events that have the potential to be market movers. Given the strong seasonal tendency for gold and silver to rally at this time of year, I see gold as having enough reasons at this time for you to be bullish.

If prices follow the above chart pattern, higher prices lie directly ahead in gold. The stongest part of the year, in terms of seasonality, is here.

Keep in mind that gold has traded basically sideways this year so I think it logical to assume that gold bulls are looking for a reason to jump into gold. Given all the events taking place in September and the seasonal tendency of gold to rally at this time of year, if gold doesn’t rally, the bulls will be very disappointed and the bears will come out of hibernation. I don’t look for the bearish event to grab hold, but you have to be aware of it and understand that importance of events lying directly ahead the expection of some analysts like me for gold to rally off of them.

The above Monthly Chart pattern above is bullish.

Look at what prices have done so far in 2012. They peaked out early in the year at 1790.4 and bottomed recently at 1526.7. At year end, December 30, 2011, gold closed at 1565.8. Therefore my statement that gold has traded basically sideways this year is correct.

I’ve circled what I think to be the most important part of this year to date. The chart pattern tells a very interesting story, one that while simplistic is extremely important as chart analysis goes. I’ve also removed momentum study from this market as it isn’t necessary in my opinion to understand the chart pattern.

The Swingline Study has a very clear pattern of higher lows and higher highs. I’ve shown the lows with a “red” arrow and the highs with a “blue” arrow. In addition, prices are trading over the 18-Month Moving Average of Closing Prices. This formation is the classic definition of a bull trend. Higher highs and higher lows are being made and they are taking place over the 18-Month Moving Average of Closes.

The chart also tells a story of where things can get bad and set up a contra seasonal trade to the downside.

What I don’t want to see is prices take out the most recent Swingline Low of 1554.4. If that were taken out the chart pattern of higher highs and higher lows would be broken and prices would be under the 18-Month Moving Average of Closes. That would end this bullish chart pattern and setup a potentially bearish one.

Therefore, longer term traders that are bullish have a number that should not be broken if the end of the year seasonal move to the upside is to gain traction. I think this very important.

Like the Monthly Chart, the Weekly Chart is displaying a pattern of higher Swingline highs and higher lows. Current prices are over the 18-Week Moving Average of Closes and but the Slow Stochastic Study is overbought. Being overbought on this chart isn’t necessarily a negative since it will take weeks to see if this indicator embeds or retraces. All charts have to become overbought before developing a bullish embedded Slow Stochastic reading.

Therefore, I go back to the most recent Swingline low of 1591.2. That is now the key number, replacing the longer term number of the Monthly Chart. It is also close in value to the 18-Week Moving Average of Closing Prices, currently shown as 1608.1.  Until this is broken, I expect to see the market find support between 1674.9, the most recent high and 1608.1.

The setup on this chart is markedly different from that of the Monthly and Weekly Gold Charts. The Swingline Study has a higher high at 1679.3 than the previous high of 1677.5, but has a lower low of 1654.4 than the previous low of 1665.1. Therefore this study is pointing down, but is not in a downtrend unless it develops a pattern of lower highs and lower lows.

Complicating matters even further is the bullish embedded Slow Stochastic reading. Stochastics are made up of two lines, a “K” and “D” line. When both lines are over a reading of 80, the trend is said to be up, regardless of what other chart studies are doing. This is what I teach and believe in.

Therefore unless the Stochastic reading loses its embedded reading, I continue to view the current price break as just “noise”. Let’s assume that the Stochastic reading loses its embedded reading. Even then because prices are over the 18-Day Moving Average of Closes, currently valued at 1633.6, the trend would not turn down if this occurred. It could neutralize, but not turn down.

In other words, I see nothing at this time that points to a downtrend setting in, especially given the current readings of the Monthly and Weekly Gold Charts. A disappointing correction could set in, but not a downtrend as I define it.

I might consider option positions as well as futures if gold turns up. What I don’t know is the story that will prompt a market turn, but as a market technician, I really don’t care what it is.

I try to do at least two updates a day, sometimes more so entry and exit points can and often do change with market conditions. Trades are also covered in my Webinars which I regularly record. In these Webinars review not only metals, but all the major commodity markets I follow. This means stock indices, currencies, interest rates, livestock, grains, softs and energy markets.

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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, 29 August 2012 | Digg This Article