Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
You Can’t Afford Not to Invest in This Latest Yesla Technology - 1st Apr 15
Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - 1st Apr 15
Bitcoin Price Down Move Still in the Cards - 31st Mar 15
No Body Understands Debt - Living in a Free-Lunch World - 31st Mar 15
Will Gold Win Out Against the US Dollar? - 31st Mar 15
Middle East Balance of Power Matures - 31st Mar 15
Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - 31st Mar 15
Gold and Misery, Strange Bedfellows - 31st Mar 15
Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - 31st Mar 15
Don’t Celebrate the U.S. Housing Market Recovery Yet - 30th Mar 15
A Middle East Nuclear Holocaust - 30th Mar 15
Peak Gold? – Goldman Sachs Research Warns of Peak Gold Production - 30th Mar 15
With Yemen Burning, Arab Spring II Is Underway - 30th Mar 15
No FED Bets From the BIS - 30th Mar 15
Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - 30th Mar 15
Economic Recovery, Geopolitics and Detergents - 30th Mar 15
U.S. Dollar, Commodities and the Gold Miners GDXJ ETF Analysis - 30th Mar 15
Stock Market Short-term Downtrend - 30th Mar 15
David Cameron Election 2015 Debate Facts Check - Employment, Immigration, Debt & Deficit - 29th Mar 15
Stock Market About Ready to Crash! - 29th Mar 15
Reflections in a Golden Eye - Gold Market Rejection, Repatriation and Redemption - 28th Mar 15
Stock Market Inflection Point - 28th Mar 15
Gold And Silver - What Moved Price? Bab el-Mandeb And Uranus Square Pluto. What?! - 28th Mar 15
Stock Market Investment Parachutes; Do You Have Yours? - 28th Mar 15
Peak Gold Misunderstanding, is Gold About to Run Out? - 28th Mar 15
Deflation Watch: Key U.S. Economic Measures Turn South - 27th Mar 15
The Hard-Earned Truth About Recreational Real Estate - 27th Mar 15
Bitcoin Price Still in Important Territory - 27th Mar 15
Stocks Bear Market Conditions - Index Market Range Warning - 27th Mar 15
BEA Leaves Q4 2014 U.S. GDP Growth Essentially Unchanged at 2.22% - 27th Mar 15
Brazil Economy Victim of Vulgar Keynesianism - 27th Mar 15
Gold to Fuel Silver Price Upleg - 27th Mar 15
Gold and Silver Stocks Will Rise Again! - 27th Mar 15
Risk of ‘World War’ between NATO and Russia on Ukraine as Yemen Bombed - 27th Mar 15
FOMC Minutes Turned The Gold Tide - 27th Mar 15
Sheffield Hallam Election Battle 2015 - Lib Dems Go to War Whilst Labour Sleeps - 27th Mar 15
Gold Effect On Mining & Shale Wasteland - 27th Mar 15
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

Gold Market sectorwide Buy Alert

Commodities / Forecasts & Technical Analysis Jan 28, 2007 - 05:11 PM GMT

By: Clive_Maund

Commodities Gold is looking technically stronger than it has done for the past 16 months. It would have escaped the notice of many that it broke out last week from a little-known technical pattern known as 3-arc Fan Correction. This pattern was not detected earlier because it is rather rare, and instead attempts were made to define the action in gold since last May as some kind of triangle, which could, of course, be bearish. However, a 3-arc Fan was clearly identified in the Streettracks chart last week on www.clivemaund.com, prompting a re-examination of the gold chart, whereupon it became evident that a similar pattern exists in gold. This is very important, because it largely sweeps away lingering doubts about where gold is headed. This is because these patterns are very bullish, and seldom break down.


We will now examine this pattern on a 1-year chart for gold. The first steep arc of the correction pattern was formed by gold dropping rather precipitously from its May high, where it was extremely overbought, way ahead of its moving averages. A sizeable relief rally followed which led to renewed decline beneath the second fan downtrend line that took the price down to successfully retest support above the June low. Gold then rallied again, breaking above the 2nd fan line only to once again go into decline beneath the much less steep 3rd fan line. Unknown to most of us at the time, it was contact with this fan line at the start of this year that triggered the plunge which got the year off to such a bad start - although we had anticipated just such a drop for other reasons.

Gold 1 year chart buy

There are a couple of important points to note about these fan corrections. The first is that what they are is a succession of progressively less steep downtrend lines that contain the price, and indicate a diminution of selling pressure over time - by the time the fan correction ends with a breakout such as we saw last week, significant selling pressure has quite simply been exhausted. This brings us to one of the rules that applies reliably to these patterns, and that is that once the price has succeeded in breaking out above the 3rd line of the fan pattern, that's it, the correction is over and the stage is set for a substantial new uptrend. This is exactly the position we find ourselves in now.

Now compare the gap that existed between the price of gold last May and its moving averages with the gap that exists now. Last May it was horrifically overbought with an enormous gap having opened up with its moving averages. Now, however, the gap is comparatively minor, and all 3 moving averages are in bullish alignment. This makes for big upside potential. Note that the averages used here are 50, 200 and 300-day. The reason for using the 300-day moving average will become readily apparent when we look at the 3-year chart lower down the page, where it is evident that gold has ridden this moving average all the way up as its bullmarket has progressed.

Because gold stalled out again at the zone of heavy resistance centered just above $660 last week and didn't actually end the week up all that much, many investors haven't cottoned on to the significance of last weeks' breakout. So let us be absolutely clear, it was MASSIVELY SIGNIFICANT, and we shall be much obliged to those sellers last week who are providing us with a last chance to board the train before it leaves the station. This is the time to load up with promising stocks across the board. Of course, we must recognize that no technical pattern guarantees success, and there is, as ever, a chance that the pattern will abort and break down, but if it does we can escape with a minor loss by employing the strategy of exiting positions in the event that gold breaks back down below the 3rd fan line by a margin of more than $5 - $7. This proviso affords an excellent risk/reward ratio to those buying stocks here.

Readers may recall that in the last Gold Market update it was mentioned that Straddle options (a combination of Call and Put options) were an attractive proposition, as gold was on the point of a big move, which could be to the downside, and that an article on this strategy would be posted soon on the site. In the light of the subsequent identification of the fan pattern in gold and the developments over the past week, however, the picture is viewed as being more outright bullish, so anyone considering options should go for the Calls and forget the Puts. Before leaving the 1-year chart observe the position of the MACD indicator shown at the bottom of the chart. This is only slightly overbought and provides a further indication that there is plenty of upside potential at this juncture.

gold 3 year chart buy

 Learn how to Trade Elliott Waves

Now we will review the 3-year chart as this puts the action of the past year into perspective, thus giving us more of an idea of what to expect going forward. On this chart we can see how the 3-arc Fan Correction has served to unwind the severely overbought condition that had developed by April - May of last year, as indicated by the yawning gap with the moving averages which has now largely closed up. The identification of the fan correction means we can be much more assured that gold is going up from here than was the case when we were trying to find a triangle fit for the trading range.

This is because triangles can break either way, and a triangle can therefore be a top, whereas this fan correction is definitely bullish, and we have the added benefit of a close exit point if it aborts. In addition to the usual 50 and 200-day moving averages, the 300-day moving average has been appended to both charts. This is because, throughout the bullmarket, gold has consistently found support near this average, as it did again in October and in the early days of this month. Note also how the price and the bullishly aligned moving averages are now bunched quite closely together, a circumstance that frequently precedes a powerful advance, as was the case in the late Summer of 2005.

In conclusion, this is a most auspicious picture. Gold is a flat-out buy here, as are most Precious Metals stocks. The reaction late last week is viewed as providing probably the last opportunity to buy both gold and PM stocks at favorable prices before a powerful advance gets underway, although it is quite common after a breakout above a fan line for the price to drift back and run along the top of the fan line for a while before turning higher - if this happens it will provide an opportunity to buy at even better prices. We have a relatively close exit point if things go wrong, as stated above, as positions should be closed out if gold drops $5 - $7 below the 3rd fan line of the fan correction. Thus we have a very favorable risk/reward ratio. While developments in the gold chart clearly have major implications for the silver price, a similar 3-arc Fan Correction has not been identified on the silver chart.

We will be reviewing a range of US stocks suitable for purchase on www.clivemaund.com this weekend.

By Clive Maund
CliveMaund.com
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.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014