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The Start of a GCI Positive DivergenceErik McCurdy As chartists, we place a great deal of importance on divergences, either between price action and technicals or between two sets of data that would, under normal circumstances, be expected to exhibit similar characteristics. When we developed the Gold Currency Index (GCI), the primary objective was to construct a tracking index that would enable us to readily identify divergences between the intrinsic value of gold and the price of gold in currencies such as the US dollar. Since we began tracking the GCI in early 2005, divergences between it and the price of gold in US dollar terms have always provided meaningful, predictive information, so we track the movements of both very closely. We have been watching for bottoming action in gold for the past several weeks, and one of the potential indicators would be the development of a positive divergence between the GCI and the price of gold in US dollars. This week we saw the initial signs of such a divergence, which means it is time to start paying close attention to the price action in gold. Below is the current daily chart of gold in US dollar terms:  An uptrend from October 4 has returned price action to near-term downtrend resistance at the middle of the Bollinger bands, while MACD momentum starts to turn up below recent highs in negative territory, MACD histograms move above the 0 level and RSI moves up toward the 50 level. Now, compare that behavior with the current price action of the GCI daily chart:  The GCI uptrend that began on October 4 has already broken well above resistance at the middle of the Bollinger bands, while MACD momentum is testing recent highs in negative territory, MACD histograms have been moving higher in positive territory for three sessions and RSI has broken well above the 50 level. Thus, the GCI daily chart is notably stronger than its US dollar counterpart at the moment. As with technical analysis in general, a positive divergence is not an assurance of a particular outcome, but rather a sign that it is time to start watching the charts very closely. The relative strength that has developed in the GCI daily chart over the past couple of weeks is a first step in a potential bottoming process, but it is only a first step. We will need to see many additional technical developments before a high probability bottom is in place. However, a positive divergence such as this is an important signal, so stay tuned! Oct 13, 2006 Daily GCI updates are provided at Prometheus Market Insight. 321gold Inc |
