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It now looks like
we were a little too bullish
in the last update, for the way gold has acted over the past week suggests that another sharp drop is imminent before the dust finally settles on this reactive phase, that it likely
to take it to or some way below
its recent panic lows.
On gold's 4-month chart it is now
apparent that a bear Pennant has been forming since the panic bottom, with the weak upside volume portending an
imminent breakdown and steep drop. A reader pointed out to me during last week that gold's panic lows occurred in thin trading on the Hong Kong market, and for this reason we do not have to factor
in the tail of the hammer
candlestick when deciding where to draw the boundaries of the Pennant. The measuring
implications of this Pennant
call for a drop at least to the vicinity
of the intraday lows of
the Reversal Hammer and possibly
somewhat lower towards the $1520 area - at this point the decline should have completely run its course and we will be
looking to buy aggressively. If we look carefully we can see that
a small "bearish engulfing pattern" has formed
in gold over the past 2 trading
days, implying that breakdown from the Pennant and the expected steep drop that will follow is
imminent. A reason why this next drop should end the decline is that gold is already deeply
oversold as shown by its MACD indicator, and it will of course be even more so after this
impending decline. Those interested in going long gold investments in
the near future should
"keep their powder dry" but stand ready
to wade in big time if
gold drops into the bright
green "aggressive accumulation zone" shown on our chart.
Other reasons why the imminent sharp drop expected should mark the end of
gold's reactive phase are
to be seen on its 1-year chart. On this chart we
can see that a decline to or below its recent
panic lows will take it deep
into strong support near to its rising
200-day moving average,
the classic point for a major reaction
in an ongoing bullmarket
to end.
Still another reason for the reaction to terminate with this final drop are gold's now strongly bullish COT chart on which we can
see that Commercial short
and Large Spec long positions have dropped back to relatively low levels - the lowest for a long, long time.
There is certainly plenty of light at the end of
the tunnel for gold over a longer time horizon, and
not just that which arises from its own COT charts.
The COT charts for the dollar are strongly bearish, with the Commercials going heavily short, and they are also going heavily long the euro.
This implies that the current state of extreme crisis in the Eurozone should ease soon
and the euro rally sharply,
and the dollar fall heavily
- which suggests that european leaders may scale back their bickering soon and cooperate sufficiently to ease the crisis with generous
helpings of QE, which will of course be bullish for gold and silver.
Our euro fx COT chart below
shows the big long position in the that the Commercials have built up.
Although the big Commercial
short position in the dollar is a harbinger of doom for the current strong dollar rally, it looks on its 3-month chart like it has a bit of life left in it yet.
The long-legged doji candlestick that formed on Friday implies that it will
turn higher again next week
and maybe make new highs.
Bearish price action in both copper and oil on Friday suggests that they too
will turn down this coming week.
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