Dec 9th, 2009 by Doug Tucker
This blog has been warning for some time of a meaningful pullback in the gold market. I’m not claiming to have called a top, or that a top has even been made. My worry was that this last impulse would turn into a vertical parabolic ascent that would be a final blow-offto this multi-year bull trend that has seen prices more than quadruple. My hope was that there would be a meaningful correction to cure some of the excess bullishness in this market.
I’ve pointed out how difficult it is to call a top when a market accelerates to the upside with the public driving the trend. I know the perma-bull gold blogs say the buying is being driven by central banks and buying in India, etc, etc. I’m quite confident that the smart money was accumulating quietly well before the uptrend started making the news, and they most likely have been selling to the public all the way up. That is almost always the case with this type of parabolic trend and the hype seen recently.
The chart above shows the daily chart of the gold etf since July of this year. I left the same red lines that were drawn on several GLD charts from past posts that formed a triangle that broke out to the upside on September 2nd. The blue line are an adaptive moving average that shows how well the pullbacks were contained during this uptrend. The indicator in the sub-graph is the adaptive CCI (see articles elsewhereon this blog). This adaptive CCI is what I use to monitor trendiness, as well as to verify divergences from other indicators. Also pullbacks to the zero line often help confirm pullbacks to moving averages. You can see a nice example of this marked on the chart near the end of October. Also worth pointing out is that prior to the breakout of the triangle, the adaptive CCI gave an advance warning of the possible direction of the breakout by forming an inverse head-and-shoulders formation, indicated near the left side of the chart. More recently, I’ve been pointing out divergences between the gold price and gold mining issue, silver, volume, andmany momentum indicators. You can see how the CCI gave a series of divergences as price moved higher. When the CCI stays over the +100 line, as it did for all of the last leg of this impulse up, the trend is usually intact. A crossing back down through the +100 indicates an end to that impulse. In this case the crossing back down through the +100 came on December 4th, the day that gold was down over $60. It was not a timely signal, however the divergences leading up to the drop gave good warning signals. Of course there were many other warning signals along the way. Technical analysis has a difficult time accurately timing emotional markets when they reach extremes. It’s usually a matter of weighing and interpreting the clues.
The big question at this point is if the bull market is over or if this is just a meaningful correction. So far gold hasn’t really entered the type of blow-off that appears to be the final expression of an entire bull market, at least not in my opinion. If this correction can be orderly and doesn’t retrace the entire leg up from the triangle break-out, it would seem the excesses will then be worked out. Then a new accumulation phase can begin, which will most likely be followed by another huge leg up. At least this is what I am looking for, but as always, the market can do whatever it wants to do. Much of the driving force will still be dictated by the dollar and the inexperience and incompetence of this government, which will probably be supportive to the gold bull over the foreseeable future. I still think that the gold market is ignoring the deflation competent. It seems to be betting on the debasing of the US Dollar and the ultimate and inevitable resurgence of inflation. But if the economy worsens, especially if the employment numbers get much worse, there could be more deflation in the interim.