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Is Gold Preparing to Bottom?Erik McCurdy As Dow theorists, we spend a great deal of time analyzing secular trends, the objective being to stay aligned with the current phase of a given primary trend. We believe that every primary trend is composed of three distinct phases, and in the case of a secular bull market those phases would be 1) accumulation, 2) recognition and 3) euphoria. Understanding and recognizing these phases better enables us to take advantage of trading opportunities afforded by the ebb and flow of cyclical trends within the larger secular trend. Our analysis suggests that gold is currently in the early stages of the recognition phase of a secular bull market that began at the turn of the century. After four years of "stealth" accumulation, during which the majority disbelieved the bull market in gold, the investing public is now in the process of recognizing the uptrend for what it is, which will lead to the influx of massive amounts of investment funds during the next several years and, ultimately, to the inevitable speculative blow-off of the euphoria phase. The recognition phase is typically the longest and most profitable portion of a primary trend, the time during which the "easy" money is made. Ever since gold and precious metal shares topped in May, we have been tracking two correction scenarios which our analysis suggested were the most likely given the assumption that we are in the early stages of the recognition phase and the fact that we had just completed a two-year consolidation. When the pennant broke down on the weekly chart earlier this month, we were then left with one highly probable scenario which is highlighted on the chart below:  Three phase corrections, or "ABC" corrections, are typical technical formations that follow strong moves within a strong overall primary trend. The A downtrend returned price action to support near the $575 level in mid June, before the B reaction moved back up to about $665. As of 9/22, the C down leg has returned to the A low of about $575. The final leg of three phase corrections usually (but not always!) makes a new low somewhere below the A downtrend, so probabilities suggest there is a good chance the correction is not yet complete. Further, there is relatively strong congestion support in the $550 area, so it would make perfect technical sense if our final bottom ended up near that level. The weekly Gold Currency Index (GCI) chart also exhibits similar characteristics at the moment:  Outlook As always, we are not dealing with certainties here. The best we can do as technical analysts is identify the most likely scenarios and then track their progress. However, price action continues to behave in a very typical manner since the recent long-term high in May, and, at the moment, the three phase correction scenario appears likely. We will be watching closely for bottoming action over the next couple weeks, as a confirmed turn higher would be a meaningful bullish signal. On the other hand, a significant move below that support near $550 (14.80 on the GCI) would nullify the ABC correction scenario and forecast a much more protracted correction. Either way, we will be prepared as the charts show us the way. Stay tuned! Sep 23, 2006 Daily GCI updates are provided at Prometheus Market Insight. 321gold Inc |
