Saturday, September 22, 2007

The BIG Picture: Gold

Gold has clearly broken out. How significant is this "breakout", and where could it lead to? Is this a major breakout that will lead Gold to the Moon? Or is this just another dose of false hope that we Gold Bugs cling to?We can try to answer these questions, and maybe a couple more by going to the BIG chart...The Weekly Chart Of Gold. Please click on the chart above to enlarge.

The first thing I'd like to point out on this chart is that going back to 2003, Gold has risen each of the past four years between September thru December. It's Gold Season Baby! This makes the odds of Gold continuing higher this Fall pretty much in the Gold Bugs favor.

Next, let's look at the September 2005 breakout in Gold that eventually lead to it's 8 month meteoric rise to, and above, $700 in May 2006. The week of May 11, 2005 Gold broke from a 9 month consolidation of the then high of $456. The euphoria that erupted from this breakout by the Gold Bugs had Gold surging through the then mystical $500 line in short order. How disappointing it then became for the Gold Bugs, when Gold went into a consolidation of the breakout almost as quickly as it had broken out. For 8 weeks Gold moved sideways in a 5% range and retested the breakout. Only when this old resistance at 456 became new support did Gold move higher....much higher.

Following the $730 high in May 2006, Gold quickly rolled over into a free fall that over the past 16 months had become a Symmetrical Triangle of Consolidation. Oh the pain, the false hopes, and frustration. The shocking whoosh this past August that broke many die hard Gold Bugs backs... And then, as so often it is the case, when it is darkest before the dawn, and many a Gold Bug considers throwing in the towel, Gold blasts from that August low and smashes its way out of the never ending consolidation in less that 3 weeks time. This past Friday, September 21 Gold closed it's third week in a row above $700. Outstanding! Hello $1000 Gold!

Not so fast eager beaver. The last 6 months of this 16 month consolidation had Gold trading inside a box. Gold broke from this box at 688. It's measured move out of this box projected to 735. I have suggested over the past week that Gold would begin to meet some headwinds at this level, and it appears that it has. I suspect Gold may have another 4-5% of momentum left in the gas tank here before, just like in 2005, Gold pauses to rest and consolidate its gains and its breakout to new 27 year highs.

Gold IS overbought on the Daily charts, but a quick glance at the RSI on the weekly chart above shows that Gold has a long ways to go in The Big Picture. The breakout in the RSI confirms the breakout in price and the validity of the breakout. Let's look a little closer at the Symmetrical Triangle and try and determine where Gold may go from here.


The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.

While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout.

Price Target: There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the symmetrical triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the pattern's trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target.

Doing the math for the Symmetrical Triangle above I get a projection of 870 for the next "top" in Gold. This number just so happens to be in very close proximity to the January 1980 all-time high of Gold at 887. Doing the math? 730-542=188 [+682]=870. For more about Symmetrical Triangles see link included above.

Wow! 870. Wouldn't that be nice. Damn right it would. But DON'T fool yourself. Nothing goes straight up. Golds run from 456 to 730, despite "appearances" did NOT go straight up...there were dips along the way. And I think what this breakout here in September 2007 tells us is that as we move forward thru the Fall, Winter, and into next Spring, Gold bugs would be wise to only buy the dips and not even consider trying to short them. Leave shorting the dips in this next leg up in Gold to the amatures...there will be plenty of fools that will try to short this rocket ship, and pay dearly for it as well. There are a lot of these fools lining up right now to try and short this market...and it's them and their attempts that will cause this pause here, and a consolidation of this major breakout. These fools will quickly realize that shorting Gold here is a suckers bet, and it is their short covering that will be the next catalyst in Gold as we break orbit and get the "OK for trans lunar injection" and begin our trip to the Moon.

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