Fractal Reports
Gold and the SPX

David Nichols
Posted Mar 14, 2008

Below are the latest Fractal Reports on gold and the S&P 500 Index (SPX). The next few weeks are absolutely critical for just about every asset market, as major trend changes could happen at any moment. It is essential to stay ahead of this shift to set yourself up over the rest of 2008, and even into mid-2009.

Fractal Gold Report for March 13, 2008

Gold managed to separate a bit further from the $966 - $974 area on Wednesday, and finished with the highest close in five trading days at $984.

We can see on the daily chart that gold has been sucked back down to $974 on every single trading day since it first reached this level on Feb. 28th. This has been a powerful "attractor/repeller" energy level, at least in the short term, so it's significant to see gold finally rise above $974 and close above it.

I also like how this move up is coming after the third major hourly test of $966, as I discussed in yesterday's report. After the third test a pattern has to step up and make some forward progress, and it looks like gold is going to come through now and move up to the next main target at $1,010.

The fractal dimension on the 150-minute gold chart has been on a long winding journey back up to a fully-consolidated reading above 55, and with Wednesday's small surge up it looks like a new short-term uptrend is finally underway.

But there are definitely concerns that this massive $300+ move up since August is approaching an end, and gold will soon move into a major correction.

Although each trending move is unique, a look back at the weekly fractal dimension can be helpful in letting us know what type of move would be typical in this situation.

Right now the weekly fractal dimension is at 38, after having been at 37 last week. It's not moving around much now because gold has been moving sideways, even though the short-term swings have been quite exaggerated.

If we look back at the last weekly trend, when the fractal dimension hit 37 - in late October - gold was about $40 away from the peak for that move. So if we interpolate a similar outcome on this current weekly trend, then the fractal dimension should be down around 30 (where even the strongest trends run out of energy) right as gold is around the $1,010 target.

It's continuing to line up well for a move up to this target over the next week or so, with the top corresponding with the late March cycle turn date.

I should also mention that I'm getting some short-term fractal targets lining up around $1,020, so there's a decent chance gold will overshoot this $1,010 target on the initial move up, but then fall back quickly to close out the week under this level. It's very common to see a tail up on the weekly candle around a major target level, and this would fit in with the full load of energy now available to the daily trend, thanks to the consolidation period we've been enduring over the first half of March.

So I'm sticking with my forecast of a coming move up to $1,010, and perhaps even up to $1,020, followed by a potentially very nasty stretch where gold corrects down to $850 or even as far down as $730.

I also want to say that a major swoon like this will actually be the best thing for gold and for gold traders - at least those who are out in front of the correction. It will give us a chance to gingerly speculate on the downside, but more importantly, it will give us one last opportunity to absolutely load up with long positions at lower levels.

This gold bull market isn't even close to completion, as it should extend out to 2012 at the very least, so the big and nasty corrections can work in our favor as long as we stay nimble and flexible in our short-term outlook.

Fractal Market Report for March 13, 2008

The SPX pulled back quite a bit off an early move over 1326, but it's really not that bad in this context. This is how complex bottoms form ahead of a strong rally, with a lot of volatility and gyrations prior to the strong breakout move.

This could definitely be the pullback that "sets in" a new up pattern and leads directly to a big daily buy signal. If the SPX rallies back up now and closes over 1326 then that will be the buy signal that we need to really start loading into sizeable long positions.

But it would also not be so bad to see one more scary dip down to explore the lows, although the SPX may not make it all the way back down to 1274 prior to the strong rebound. If there is further immediate weakness, the SPX should hit a nice "slingshot" level at 1287 - 1290, provided I'm reading this developing pattern correctly.

It's always harder to get a handle on the important attractor/repeller levels during a complex bottom or topping process, as there is a lot of swirling energy at major turning points, and it can take a while for the pattern to emerge. But I think there's a good chance we'll see one more dip just below 1290, and the SPX will rally very sharply from there.

If we see this happening, 1287 is likely to be as close as we'll get to a triple bottom, and the SPX should rocket off from there and launch into the big new uptrend. So let's look out for this, as it will be a great speculative opportunity.

As far as the current fractal dimension readings, they are not offering much guidance right now. The 150-minute chart has been swamped by the exaggerated moves, as the SPX is not really moving in its typical 3 to 5 day rhythm of trend and consolidation.

The daily chart is showing room for the downtrend to continue, but it's already been a 116 point move down just since Feb. 27th so there's a better chance the trend has already played out fully.

At the risk of adding to the confusion, the daily fractal dimension can actually move lower over the next few days even if prices don't go down anymore. This is one of the subtler aspects of interpreting the fractal dimension. All market indicators factor in candles from the past to help make sense of the present, but this also means that there are always candles "dropping off the back" of the look-back period. Sometimes these candles dropping off can affect the indicator more than the candles occurring in real-time.

In the current case, the candles dropping off the back will make the down trend appear more linear - as again, it was a 116-point move down in the SPX - so we should not rely too much on the 44 reading on the fractal dimension.

So we're looking for either a move down towards a triple bottom, or a breakout move over 1326. Both scenarios should be used without hesitation to enter long positions, as this looks like one of the best contrarian buying opportunities of the decade.

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David Nichols
email: editorial@fractalgoldreport.com

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