CHARTWORKS - JAN 22, 2010
Gold – Lows Right Around the Corner

Technical observations of RossClark@shaw.ca

Bob Hoye
Institutional Advisors
Posted Jan 25, 2010

The timing for an intermediate low has arrived. January 21st is day number thirty-three in the originally anticipated window of 31 to 37 trading days from the December 3rd high. The magnitude of the past two day’s action (down $53) likely did a good job of shaking out many long speculators. If prices stabilize and then turn higher in the coming weeks we will have enough participants back on the sidelines to support the next rally. We continue to categorize the break as merely a correction in what will be viewed as a pause in the longer term bull market.

Support was possible at three levels; $1,105 (the rising trendline from August), the 20-week moving average (currently $1,090) and the $1,050 to $1,070 range (now refined to $1,055).

Regardless of the short term action a breakout of the resistance line from December 3rd should be viewed as a point where one could add to long positions.

(Click on images to enlarge)

The 20-week average was chosen for a specific reason. It has a direct correlation with the length of time the market consolidated. The breakout of the multi-year consolidation in October 2007 was similar in pattern to the Dow at 1,000 in 1982, Crude Oil at $40, copper at $1.40 and gold at $195. Each had its own time period and related moving average as it corrected from all-time highs. In the case of gold the pattern called for a rally to at least $1105 or $1170 once the price exceeded $970 last August. The subsequent correction we are experiencing should ideally have come back to test this average, keeping it in the context of the prior examples. So far so good.

Scenario I: If gold can hold around the 20-week average through this cyclic low it will be putting in a higher low than December (have given back 86% of the advance) and be in common with pullbacks that were included in gold’s strongest bull markets. New highs would be anticipated soon after penetrating the resistance line from December 3rd.

Scenario II: If prices continue to decline then the pattern will have the appearance of an A-B-C from December 3rd and the projected downtrending support angle from December 22nd will offer a support at $1,055 +/- $5. A spike down into this level would be considered a buying point for aggressive traders. This action would call for a more labored advance in the coming months with a targeted upside range of $1170 to $1190.

Form is of more importance than time or price

January 13th commentary: “The large COT levels at the end of November became an overhang to further near term strength in gold. However, the six week consolidation has seen reductions in the net short commercial and long non-commercial positions by 30,000 and 35,000 respectively. In the strongest of gold’s bull markets we’ve only needed a decline of another 5,000 contracts to allow the market to stage its next significant advance. One more decline in price could be enough bring about this ‘cleansing’ of positions.“

We can assume that this week’s action should help to alleviate some of the large COT positions. However, the data is compiled on Tuesday’s for release on Friday so we will not discover the extent of impact until January 30th.

A number of stocks in the sample list have achieved the initial support levels (highlighted)

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Jan 22, 2010
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com

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