David Banister has been nailing Gold price movements, so I though it is worthwhile to continue to post his articles on the subject. Below is his full, free article.
Before reading Banister’s article, my thoughts on Gold and GLD are that a short-term pullback is probable, but the long-term uptrend is still intact. My thesis for a short-term pullback is based on the current divergence between price action, which is near a double top, and a variety of momentum indicators. Using stochastics, MACD, and RSI, we see that while the price of GLD is near its high from the middle of August, the momentum indicators are lower than they were in August:
I think it would be crazy for an individual to outright short GLD or Gold at these levels. However, profit taking for short to intermediate term traders and investors could be in order. Stop losses on current long positions in GLD would serve to lock in (presumed) gains if my thesis is correct. If I am wrong and GLD continues higher, the stop loss could be adjusted upwards as the price of GLD increases.
A defined-risk short option position could also be implemented. Specifically, a vertical call spread on GLD would offer a limited-risk, limited reward short position. A current example of a bearish call spread trade on GLD would be the 186/188 spread, which entails selling the September 186 call and purchasing the September 188 call. This spread last traded today for $.58, giving you a $.58 credit and $2 in risk. (Please note: I am writing this after hours so tomorrow’s option prices will differ). This is basically a low-risk, low-reward bet that GLD will not reach a new all-time high in the next 8 days.
And now, onto Dave’s article. If you are interested in reviewing his service, checkout out Market Trend Forecast here.
A few weeks ago I penned a public article and private forecast for my subscribers calling for a major correction in Gold being due. 72 hours after my forecast, Gold had dropped a stunning $208 per ounce in 3 days catching most by surprise. Why did I forecast a top in Gold then? Why did Gold rally back to new highs recently? Is the Gold Bull Market now over? Let’s see if I can answer those questions with some level of logic below.
I had forecasted a major correction because Gold has had a run of 34 Fibonacci months from October 2008 to August of 2011 from $681 to $1910 per ounce spot price in US dollars. That type of pattern was formed with a clear 5 wave move, with obvious corrections along the way. The reason I was confident of a major correction was due to the confluences of the 34 months of time, the price relations to prior rallies and corrections, and the Fibonacci sequences coupled with the sentiment and cover stories on Gold in major publications. Gold should have entered into a multi-month correction that will consolidate that 34 month move, and the first shot across the bow was the $208 drop in 3 days.
Interestingly, that $208 drop over 3 days corrected 50% of the 8 week move from $1480 to $1910. As we can see markets move very very fast these days and can whipsaw even the best of traders. I told my subscribers to cover their short bets at $1724 spot, and since then we rallied to $1920 this week before topping again.
The reason Gold rallied back and touched the old highs and then some was due to the German Court pending decision regarding the constitutionality of backing the Eurozone countries with bailout funds. Today we had a positive decision by the court denying claims that the bailouts were unconstitutional. Had the German Court ruled the other way, we would have seen Gold spike to $2000 and the SP 500 and European Bourses tank hard. So if you were getting long Gold on this recent rally, you were taking on a lot of short term headline risk and I told my subscribers it was best to stand aside until we got the ruling.
Now that the ruling came out, Gold has topped at 1920 in what typically traders would call a “Double Top” pattern, but it’s more involved than that. In the work I do, we call it an “Irregular correction “ pattern, where the retracement of the $208 decline runs all the way back up and past where the decline began at $1910. These are very rare patterns and again, I believe exacerbated by the Eurozone issues as they hinged short term on the German decision. What we should see now is what I call a “C WAVE” to the downside, with targets typically at $1620 relative to the rally from $681 to $1910 over 34 months. A drop of $290 is only 15% from the highs and would fill in gaps in the Gold chart.
Will Gold drop that low? The fundamentals for Gold are screamingly bullish, but the entire world knows that and it may be priced in for a while. Gold should consolidate those topping highs for a while to let the fundamentals catch up the price action in Gold which ran ahead of them and then some. The Gold bull market should run for 13 Fibonacci years, and I have been bullish since November 2001. I understand the fundamentals are very strong for Gold, so please don’t miss-read my comments ore forecast. I use crowd behavior and psychology to help pinpoint major tops and bottoms, and right now we should have some more work to the downside to correct sentiment in Gold and then allow for the base building period before the next leg up towards the highs in 2014.
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. Greece is but the beginning.