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Gold Imminent Reversal and Retreat, Stocks Bear Market Pattern Developing

Commodities / Gold and Silver 2010 Jun 27, 2010 - 02:42 PM GMT

By: Clive_Maund

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleA great way to make yourself popular is to tell people what they want to hear, and the trick is to make yourself scarce before the wheel comes off, or at least slip quickly into the background when it does. Thus you’ll find no shortage of articles out there telling you what a great investment gold is and the countless reasons for buying it. They are “playing to the gallery” which is normal near a market peak. However, most of the evidence that we are examining points to an imminent reversal and retreat - not a bearmarket though as the bullmarket in gold is thought to have much further to run and will probably end in a spectacular parabolic blow off with prices at dizzying heights compared to today, but this is still a long way ahead of us - over a shorter time horizon we may first have to deal with a significant correction.


Let’s start by putting things in context by looking at gold’s long-term chart from the start of its bullmarket way back in 2001. Gold still looks robust on this chart and there is in fact no sign at all of an end to its bullmarket. However, we can also observe how it is once more approaching the top return line of a large uptrend channel. This is what stopped it in its tracks back last December and from other evidence looks like it is about to do so again. This is a most useful chart as it makes clear that gold could react back to the $900 area, or even the $800 area, with its long-term bullmarket remaining intact. Thus, if gold does react back heavily soon, we should not be thrown by it, but instead look to build positions increasingly the further it reacts back.

Now let’s look at the much shorter-term 6-month gold chart to see how things have been shaping up in the recent past. While gold’s cheerleaders have predictably been making a great song and dance about its rising to new highs over the past week or so, as we can see the gains have in fact been incremental, which is reflected in the weak momentum revealed by the flaccid MACD indicator shown at the bottom of the chart. In addition, a bearish Rising Wedge appears to have developed which portends a breakdown and potentially severe drop. While a clear break above the top line of the Wedge may negate it, a breakdown from this pattern will be a bearish development which will be viewed as a sell signal. Either way resolution of this pattern must occur soon as the price is now approaching the apex of the Wedge, by soon we mean within a week or two.

Factors giving added significance to the potential bearish Rising Wedge in gold are of course the continued non-confirmation of gold’s new highs by silver and the gold stock indices, which have stubbornly refused, at least up to now, to break out to new highs. They continue to labor under their respective walls of overhanging supply, and whilst it is clear that they have by now worked off most of it, this won’t do them any good if demand suddenly dries up and they turn tail and plunge. This non-confirmation is getting to be an old story but it continues to be a hugely important factor that we would be most unwise to lose sight off.

The silver non-confirmation may be examined in the Silver Market update, here we will look at it on the 3-year chart for the HUI index. This chart shows that while the index is now in position to break out upside, which would be expected to lead to a strong advance, it could be completing a large Double Top, and if it is it could plunge, especially if the broad market caves in, the prospect of which we will be looking at below. Fortunately, with a clearly defined uptrend in force from February of this year, investors and traders can adopt a mechanical approach, which is to get out or employ protective measures such as options should this uptrend fail. If it does things could turn ugly fast.

Gold’s COT chart is regarded as bearish at this point, with Commercial short positions approaching the levels they reached last December, just before gold topped out and reacted heavily.

The dollar is believed to have started the process of topping out, with the exact high being called on the site within a day of its occurrence, partly on the basis of extreme sentiment readings. However, having reacted back sharply to its rising 50-day moving average, so that short-term oscillators, which were showing an extremely overbought condition, have completely neutralized, a bounce back towards the recent highs looks likely short-term. The long-term outlook for the dollar, beyond a possible panic out of stocks and into Treasuries, is very bleak indeed, especially if the heat comes off the euro.

The broad market continues to lazily complete a large Head-and-Shoulders top area. While some commentators are calling this action a reaction in an ongoing bullmarket, our 3-year chart shows that the uptrend from March was a bearmarket rally that ended at an exact Fibonacci retracement level immediately it ran into a zone of strong resistance from the preceding larger top area. In addition, action in May was strongly bearish as the index dropped back from the top of the Head of the suspected Head-and-Shoulders top area with high volume down days and a near 1000 point intraday panic drop in the DJIA, which is hardly the stuff of bull markets. This is why the current pattern is regarded as a probable Head-and-Shoulders area. The neckline of the pattern is horizontal, failure of the support at which is expected to lead to a severe decline that can be expected to drag down other sectors such as the Precious Metals. The only open question now is whether the market completes a symmetrical Right Shoulder to the pattern, which could take some weeks yet, or whether, as is quite often the case, the Right Shoulder is brief and stunted - if it is the breakdown could occur very soon now, or even immediately.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2010 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

Clive Maund Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

strongman shelford
27 Jun 10, 17:20
Russia and Gold

I disagree with you . Russia just bought 16% of global monthly production. They want to buy more gold.

check the seasonal charts of gold and silver. what happened to gold and silver in the last 10 years after jun-jul and why jun-jul are the weakest / best mid year months to buy gold and silver.

Sorry, I really don`t see gold falling to 900$. If you have said " 1050" well that`s the technical floor the Bank of India established last year. but 900? it`s just a technical analyst dream and fantasy.

Ignoring the facts and trusting only the charts can lead to failure. you could adjust your "bearish potential" up to 1050$. But not lower!


dincer
27 Jun 10, 18:42
Mr. Maund, is there any update of your $GOLD:$USD Analysis?

A few weeks ago Mr. Maund tried to reach some conclusions by looking at $GOLD:$USD chart. That analysis is a total non-sense. $USD is US Dollar index, which measures the performance of US Dollar against other "fiat currencies". Maybe comparing $GOLD:UDN chart (UDN is "US Dollar bearish fund" and is a measure of fiat currencies other than US Dollar) with $USD can make sense. I suspect Mr. Maund recommended his clients to sell GOLD, since he saw a bearish pattern for GOLD against $USD (!)


Sammy
27 Jun 10, 20:12
gold bear

Clive you fail to mention that youve been bearish and wrong on gold for the whole of 2010.

you say the same virtually every week !

instead gold has gone from $1050 to $1250+!

And the same goes for your stocks bear market rally top calls, where each time you call its end, it afterwards goes to a new high.


Todd
27 Jun 10, 21:04
Gold

If the Fed stopped buying Treasuries & toxic debt and quit bailing out banks, Freddie/Fannie and US states, gold would be at a top. Gold pricing is simple, dollar keeps dropping in value and debt concerns grow, gold goes up. Simple as it gets.


Herb
28 Jun 10, 10:19
Gold Top!

Gold has hit it's top at 1266.5, look out below!!!!


Jordan
01 Jul 10, 14:27
Death Cross Bear - Gold & Commidities will follow

The 50 MA is about to cross the 200 MA (known as a death cross) further supporting the notion of a bear market on the threshold. The daily S&P has also broke below its "head and shoulders" neckline. Gold and commodities have declined over the last 2 days... I am not seeing many positive signs for the markets right now.


Dr. Ellen Brandt
04 Jul 10, 11:03
Tea Party Botnets

The Tea Party's captive botnets have been sending what amount to chain letters to anyone they think might be a potential supporter urging them to short sell everything in sight - and apparently, they're already succeeding.

Since markets are leading indicators and have a major influence on consumer confidence, these "patriots" hope to cause another Crash similar to 2008 for the sole purpose of securing the election against incumbents.

This purpose may or may not be a legitimate one. But causing a Crash and a double-dip recession to do it is reprehensible.

Of course, it is not more reprehensible than an exact similar campaign waged by MoveOn.Org botnets in the summer of 2008 to help their candidates - and harm millions upon millions of Americans in the process.

We have to wake up to this vile - and Evil - behavior and do something about it.

Most real people - whether we call ourselves Republican or Democrat, Progressive or Conservative, Investor or Trader - don't make their purpose in life harming our fellow Americans, our fellow human beings.

But script bots and their botnets have no emotions, no morals, no integrity, no decency.

And we real human beings have now become mere pawns in "massive multiplayer games" which have moved out of the realm of World of Warcraft and Second Life and firmly into the realms of stock and bond markets and forex.

Am I being alarmist?

I suggest you Google "forex bots" or "algorithmic bots" or even "verbal sentiment bots" NOW. You will be shocked. Good! Because we ALL have to be shocked to the point we stop debating the wrong elements of Financial Regulation and start debating the right ones - how automated markets run by computers alone are literally destroying this country, this world, and all we hold dear.


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