This
article will examine the current up leg in gold price that originated in
October 2008, present a study of the Fibonacci relationships of this price
movement that are evident both in terms of price and time, and offer a
projection of future price movement within the time frame suggested by the
evidence.
*
We
will begin with a simple weekly chart of the World Gold Index (XGLD)
and employ a diagonal support trend line and three horizontal lines
identifying price breakout levels. No doubt you will notice that price
movement has been subdivided into three completed stages, each separated by a
new break higher through a horizontal resistance line. And,
current price is contemplating a move higher that would take it into a fourth
stage of the up leg.
This
first chart gives us a general concept of the shape, size, stages and
elapsed time of this massive up leg in gold. This will be important to
keep in your mind as the following charts will add considerable visual
complexity to this price history.
I
am going to present three charts that have taken various Fibonacci measurements
into consideration and identified their location on the gold price
chart. This first chart observes the Fibonacci relationships of price
movement. Measurements are taken from price movement that results in a
low, a high or a breakout. The second chart observes the Fibonacci
relationships of lows, highs and breakouts measured in terms of
time. The third chart attempts to consolidate and simplify the most
significant details of the two preceding charts. This chart details
both Fibonacci price movement and time on a single chart and offers a
possible future outcome for price movement within a specified time frame.
*
Each
Fibonacci measurement uses the base price of $681 which was the price of gold
when this up leg began in October 2008.
I
have retained the white horizontal lines that subdivide price movement into
three complete stages, though admittedly you will have to look carefully to
find them. They are identified as Level 1, Level 2 and Level 3.
Level
1 concluded with a bullish breakout that rallied 38.2% while Level
2 concluded with a breakout that climbed 23.6%. Price is
presently at the Level 3 horizontal resistance level and should it breakout
and also rise 23.6%, gold would be taken to somewhere around the $1639 area.
I
found it interesting that most lows (but not all) were in Fibonacci
relationship with a high that followed it. Also, literally every time price
reached the diagonal trend line it turned out to be a significant Fibonacci
price level for either a future local high or a return to the trend line. Finally,
the Level 2 and Level 3 price levels were each affirmed with a Fibonacci
relationship.
*
This
next chart considers various price landmarks and their Fibonacci
relationships observed in terms of time. Unlike the previous chart that
uses the $681 price of Day 1 as the basis of all observations, this chart
notes the Fibonacci time relationships that exist using many different
starting points, each of which is associated with either a low, high or
breakout of a resistance level.
My
impression of this Fibonacci time data is that it may be an even stronger
determinant of significant price turning points than we observed in the
previous chart of Fibonacci price data. This suggests to me that gold does
indeed has strong cyclical and seasonal characteristics.
Nearly
every significant low, high and breakout had a Fibonacci time relationship
with another price landmark that followed. I was truly amazed at the
intricate time relationships I found and I am sure I did not find them all.
*
This
final chart is my attempt to synthesize the preceding charts, simplify and
offer an hypothesis on future price movement. But rather than use the
previous model that included significant consideration of the horizontal
price levels that separate the three concluded stages, I decided to take a
fresh look at price action and made some interesting discoveries.
Here
I have subdivided price movement into four stages which are identified using
four different colored rectangular borders. Each stage has a singular
similarity - that being significant price action occurring at the Fibonacci
61.8% level of the rectangle, as measured from the baseline price of $681 to
the top of the rectangle. We note that the height on one rectangle become the
identified break out level within the next rectangle. And, each rectangle is
separated by a drop in price movement that rejoins the long term
trend line before beginning the next rectangle.
Future
price movement suggests the current rectangle will top at $1639.
Various
Fibonacci 50% time relationships are illustrated. If the February 2010
low is of large scale significance, it would be the 50% midpoint of gold's
beginning in October 2008 and somewhere around May 23, 2011. Also,
if gold should break out this week within the fourth rectangle that
would correlate nicely with the breakout within the first rectangle, as the
midpoint of this time frame is the beginning of the third rectangle. Finally,
we are presently at the 50% mark of the time frame contemplated for the
current fourth rectangle.
If
you have comments, questions or new insights about the Fibonacci relationship
of the current gold up leg and want to share them with me, just send me an
email.
John Townsend
John Townsend invites you to visit his website at www.theTSItrader.blogspot.com. He usually
offer a few posts each day on his market observations, often comment on
the particular stocks he is currently trading, and tries to show ways to use the
True Strength Index indicator to make some sense of where the precious metals
and their miners are heading. Please do not hesitate to contact him.