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The GCI Pennant Breaks DownErik McCurdy The Gold Currency Index (GCI) pennant formation that we have been tracking on the weekly chart since the beginning of the summer experienced a meaningful breakdown on Monday, suggesting that there is now a reasonable chance we will see a new low before the intermediate-term correction from May completes:  As always, only the close matters, so we will need to see where the index goes out on Friday, but the break below pennant support shown above-coupled with the continued deterioration in technical indicators such as momentum and price oscillators-suggests that the current period of consolidation has more work to do before the long-term uptrend is ready to resume. The daily chart also suggests that additional weakness is probable as Monday's breakdown took price action well below the Bollinger bands while momentum and oscillators moved to new lows in negative territory:  Precious Metal Shares Lead the Move As usual, the GCI breakdown was preceded by a breakdown in precious metal shares:  The Gold Miners Index broke below support at the lower boundary of the rising wedge on Friday, and then that breakdown was confirmed by Monday's sharp sell-off. This close correlation between precious metal shares and gold itself further supports the validity of the breakdowns and recommends caution for the time being. Where Do We Go From Here? As we like to incessantly note, there are no certainties in the financial markets, merely possible scenarios and probabilities thereof. Thus, the best that we can hope to do as market participants is to identify-and align ourselves with-the high probability scenarios. Given the recent breakdown in the gold sector, probabilities suggest that the consolidation begun in May still has some work to do. Further, the price action now favors a three phase correction. The first phase brought the GCI to its mid June low, the second phase ended at the mid July high, and the current phase should result in a final low that completes the intermediate-term correction. Exactly where and when will that bottom occur? Of course, that's impossible to say. There is a good chance the next low will be somewhere in the general vicinity of the June low near 14.50 and it will probably take place sometime during the next several weeks, but that's the best that we can foresee at the moment. However, the closer we get to that bottom, the more clarity will be afforded by the charts, enabling us to take advantage of that next buying opportunity. We will be watching the GCI closely for any potential positive divergences between it and gold in US dollar terms as such signals almost always correspond to trading profits. Sep 11, 2006 Daily GCI updates are provided at Prometheus Market Insight. 321gold Inc |
