-- Published: Thursday, 27 March 2014 | Print | Disqus
Isn’t there a song lyric that goes; “what goes up, must come down, spinning wheels..”. This pretty much describes gold in the first quarter of 2014 if you look at the price action since the end of last year.
Gold feel to new lows on the last day of 2013. Starting on the first day of 2014 gold began to rally and continued that rally until it hit a high of 1392.6 on March 17, 2014. Today’s date is March 26, so I’m not talking about current highs.
Given that the low of 2013 was made on December 31st 2013 at 1182.3 and the rally just ended at 1392.6, the overall rally was approximately $210 an ounce. That was a big move of nearly 17% in but three months. Up until now, breaks have been shallow and short lived but the current break is different, as it is nearly two weeks in the running and nearly $100 an ounce in size.
Gold ETFs that had seen their shares dump gold into year end came roaring back in January and February. Now the question is whether or not the purchasers hold on.
We’ve seen a lot occur since last month’s letter.
- In the background we have a Russian escapade in which Russia made a successful land grab for Crimea. Eurozone members are paralyzed as their reliance on Russian energy and the impact of doing anything against Russia might cause Russia to stop exporting fuel to them. Therefore the EU is reluctant to do little more than small sanctions.
- China continues to see its economy shrink. Their growth compared to ours or those of other G-7 members is still stellar, but when compared to Chinese growth of recent years it’s clear that their growth engine has slowed down rather dramatically. China has also begun the process of allowing corporations that were with state ties through regional banks to declare bankruptcy.
- We continue to hear stories about deflationary pressures in Europe, Japan and even in the US, but so far the central banks haven’t decided to use or implement new QE measures by any of the above countries. If anything there is a reluctance to do so. In the case of the US, tapering of existing QE is underway. Tapering back still means additional stimulus is going on, but the amount of such each month is being cut back.
All in all, the gold market has now given back 50% its’ rally since December 31st. It’s near this level some support might soon be seen.
I eliminated on the above chart the 30-year historical pattern in order to find a seasonal pattern that is number one, more current and more importantly, portrayed the rally that took place from the end of December through mid-March. Both the 5 and 15-year seasonal patterns fit this bill as you can see above.
I don’t rely on seasonal patterns by themselves, but when they fit in as well as these it’s hard not to take notice and assume that’s the pattern at work.
On the weekly chart you can see that as nice and large as the rally was from December 31st, it wasn’t strong enough to carry up to the 100-WeekDay Moving Average. Support is back down at the 18-Week Moving Average of Closes, 12175.4.
Momentum as measured by the Slow Stochastic reading is overbought and in need of correcting.
Overall, this particular chart looks as though its going to have to fight a battle to stay over the 18-Week Moving Average of Closes in order to keep its upside momentum in place. The Swingline Low, which is the number that must not be taken out given the current chart formation of higher highs and higher lows, is 1235.2. If taken out, the chart pattern would no longer be bullish.
Therefore, this chart has momentum pointing down towards support at 1275 and the Swingline Study is still bullish.
The above chart is that of the April 2014 Comex Gold contract. I will be switching you over to trade the June contract by this weekend, but because it’s still not yet first notice day and this is the closest contract to the cash market, I’ll use this chart for this analysis.
The Swingline Study as labeled in brown is pointing down. This is the brown line running over the daily bars on the above bar chart. This study is showing a pattern of lower highs and lower lows. The most recent high is 1343.00 and the one prior being the recent spike high of 1392.6. By definition, a downtrend occurs when this study is portrayed as having lower highs and lower lows which I define as a bear trend.
Next, prices are trading under the 18 Day Moving Average of Closes. This confirms the bear Swingline Study. One of my trading rules that I teach in my charting course is that you look for reasons to sell when prices are trading under the 18-Day Moving Average of Closes. Rallies also often stall out at this number when prices are trading under this moving average.
A profit objective might be the 100-Day Moving Average of Closes, the green line on the above chart. The 100 Day Average is very popular as a trend tool amongst longer term traders. Its value comes in at 1275.
The momentum indicator, the Slow Stochastic Study, is shown on the bottom of the daily chart. It is currently in oversold territory. I define oversold as a reading in which the “K” or “D” lines that make up the study have a value under 30, but are not going sideways together under a 20 reading. While both numbers are under 30 on this chart, they require doing so for several consecutive days. Today is but day one so at least two more consecutive days of reading under 20 are required to change this reading to one of being “embedded”.
An embedded Slow Stochastic Reading occurs when momentum changes from being oversold, to “locked in”. This is one of the strongest chart readings I make note of. The reading is lost when the “k” line gets back and closes over 20. Until that occurs, rallies are short selling opportunities.
Gold has fallen far enough to qualify for a 50% correction from its high to today’s break low. By itself that might be enough to cause some short covering.
One of the wild cards is of course Russia and the next move Mr. Putin decides Russia should take. It’s clear the Ukrainian army is no match for Russian troops. There wild card is whether or not a full scale invasion by Russia into the Ukraine is either necessary or in Russia’s best interest. As it stands, Russia did a land grab that hasn’t provoked the West to do much other than some very moderate social and economic sanctions. In other words, Russia got away with it and might decide that’s the end of this.
If this is what Russia decides, the game is over in terms worrying our building in a premium for the “next Russian move” as I like to call it. My opinion is that Russia won’t move further into the Ukraine as it doesn’t need it.
As long as gas continues to flow to Europe, the EU will talk hard, work with the US on preparing and implementing “soft” sanctions against Europe, but in the end do little to put itself into a position where it could look energy flow from Russia.
Therefore gold is probably fairly prices at current prices levels.
There’s little worldwide inflation. If anything Europe still faces the threat of deflation.
Russian aggression might be over.
The seasonal uptrend looks over, with prices according to the seasonal chart likely to work lower in April.
My advice to my customers is likely to be to get short gold either on a rally or, if the Slow Stochastic reading embeds, to get short once that occurs. I have the $1275 price level as the next downside target IF the Slow Stochastic reading embeds.
If prices were to rally now with the Slow Stochastic reading embedding, I can make an argument for a move back to the 1340 level, which is a sell zone.
The one large caveat is Russia. If Russia decides to move further into the Ukraine my near term the objective would be 1392, the recent high. If that were exceeded, prices might go to the 100-Week Moving Average of Closes near 1482.
As you can see, I am laying out a number of scenarios, but given that I don’t think Russia is going to do more land grabbing, I think the bearish scenarios are the ones most likely to develop.
As is my custom, I issue signals to my subscribers on gold and other commodity markets in my twice daily written and oral updates. I do issue Special Updates intraday as trading warrants.
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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.
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-- Published: Thursday, 27 March 2014 | E-Mail | Print | Source: GoldSeek.com