Three Scenarios For Gold

It seems like everyone's guess nowadays is whether gold has topped and if not, how much more upside potential is there. I'd like to present my intermediate view on gold in this post. But first, a little bit of history.

For those of you who are not familiar with a general trajectory in gold during this bull market that started in 2000, I must first point out that gold tends to progress in some sort of wave patterns. It usually consolidates for several months or even years, making only a very modest, but steady progress. After these consolidations a violent parabolic tops usually develop. Let me show some historical tops to illustrate this.

The first significant parabolic top occured in May of 2006. The wave started in February 2005, consolidated for 9 months and then suddenly shot higher, gaining approximately 25% in twelve weeks. It then consolidated for seven weeks and exploded higher again to a final parabolic top that made more than 35% in about 8 weeks. After that gold plunged 20% and the whole thing started all over again.

March 2008 top was almost an exact copy of the previous, with one exception. Everything extended as precious metals sector attracted more and more investors. Starting in June 2006 gold consolidated for fourteen months, followed by two parabolic stages, gaining 20% and 30% in 12 and 13 weeks respectively. This wave was reset by more than 30% plunge during the 2008 general market collapse.

OK, and here we are. History repeats again, you know the drill. The current wave started in October 2008. It consolidated for two and half years (extended again!) in a steady uptrend. If (IF!) this wave is to finish in spectacular two-stage parabolic top as we are used to, the first stage gained 25% in 8 weeks and is already over. And if another leg up is following, gold should now consolidate for 3 to 8 weeks and explode higher into another 25% to 35% parabolic run, which could take gold to as high as 2300. A severe 25% plus correction should then follow before another wave starts.

Of course, this is just speculation! As a trader I must always consider all possibilites. I think the following three scenarios are the most probable right now. The first one is the two-stage parabolic top discussed above. If this one is to reveal, we should see few more weeks of consolidation with virtually no progress, followed by break out of consolidation pattern.

The second scenario is a double top. Gold could marginally break to new high without consolidation and then plunge lower.

The third and the least preffered one is the possibility that gold already topped. We will know this is happening if gold fails to make new highs and violates the last swing low.

As you can see all three scenarios can be easily identified so we can be preparred for any one of them. Right now I don't have a clue what will happen. We'll just have to wait until the market itself tells us what it wants to do.

Markets Wedging Again

I'm not too happy with the action I'm seeing in stock market indices in last three days. After distribution day we got a two day rally on lower and lower volume, which is a wedging rally. In general, this is not a good sign as it shows the lack of demand on the way up. However, things are not that bad after all as volatility has finally decreased. Markets cannot advance on large price volatility as this brings up sellers. The modest volume means there is little selling going on right now, but for a sustained move we definitely need at least one major accumulation day, which we have not seen by now. I'm still afraid that what we're seeing is a bear market rally, which could still go higher, considering how oversold the market was two weeks ago and a pretty large selling climax. I'm going to monitor markets very closely every day in search for signs of distribution, which would confirm this view. However, a confirmed follow through day could quickly reverse the picture upside down. So, for now I'll keep my market signals intact and just wait for any confirmation.

Mixed Signals

Thursday and Friday of the past week brought quite some ambiguity regarding the favourable direction of the stock market. Thursday was pretty strong distribution day on S&P 500, Dow Jones and NY Stock Exchange, but not on Nasdaq, which is the most important index in my opinion. Volume on Nasdaq was very low on a down day and consequentialy gave us a buy signal on Friday as index advanced strong on increased volume. Although I would very much like to see a stronger follow through day on all indices, the action we are seeing still looks promising as volume slowly subsides. However the price volatility is still high, meaning a battle between bulls and bears is still in place. For a sustained uptrend price action should stabilize.


Let's take a look on gold. On Thursday gold pierced through ascending trendline, but closed strongly above it, which is an indication that the trendline break was heavily bought. On GLD, the most widely traded gold ETF, this was seen as a gap below the trendline and advance for the whole day. I noticed in the past that technical levels on gold often get breached, before final advance into intermediate tops. The volume on this accumulation day was good, but not very high, which is normal, as not very many big institutional traders are willing to buy into parabolic tops. However, the trendline break, solid volume and strong close indicate that gold might try another stab into new all time highs. Maybe even as high as 2000. A follow through on Friday and a swing low were enough for me to issue a BUY signal on gold and I even took a position in GLD, with a very safe stop below the recent swing low.


There is only one thing I would like to make crystal clear to anyone reading this. I DO NOT expect any big profits from this trade. I only took a position because gold gave me a logical stop area. I think many traders shorted the recent top and their covering could fuel this rally. And any move into new highs would also fool many traders into thinking that this is some sort of a breakout and that gold will just advance from here for years. Parabolic tops ALWAYS break down when the loose support of institutional players! There are never any exceptions to this rule. It is only a matter of time when everyone decides to take profits and lets the price fall. Any breakout into new highs would thus issue a SELL signal for me and after that I would trail my stop higher. I still believe this is a parabolic run into long term top that should roll over soon. If and when it does, the drop should be breathtaking. I strongly advise anyone wanting to accumulate on gold for long term investment to wait for a more considerable correction into a weekly cycle low and then start to buy. We should not wait too long for this to happen. Just don't let be fooled by media pundits that gold will just rocket to 3000 from here.

Markets Neutral Again

On Tuesday all major stock market indices posted nice gains on increased volume. Although volume increased a little bit from the previous day it was still very light according to the two distribution days from the last week. However, the behavior is encouraging as last two day's action looks like a low volume test of the August 9 low. Yesterday's reversal was enough to put my model in NEUTRAL stage, meaning that I don't short and may buy at most one stock, anticipating a bullish reversal. For more aggressive buying I will wait for more convincing signal. For this to happen tarket should rally from this levels on solid volume and hold the gains and then post some sort of a breakout on very high volume (a follow through day).

Gold Tagged The Resistance Trendline

I just want to point out one observation. Yesterday gold tagged the rising channel trandline that has held every intermediate top since the start of this bull run in 2008. Again, it may go marginally above it, but first real support is way down low. I would not take a chance here.

Sell Gold Now!

Friday's churning candle on GLD makes me think that we are now really, really close to the top of this two month parabolic run. I never try to call exact tops, but holding any large positions in precious metals right now is a very risky business in my opinion. I suggest tightening stops or just selling everything. Take your hard-earned profits and take a vacation from precious metals.

Sell Signal On All Indices; Gold Near Completing Climax Top

A huge distribution day yesterday sent all indices that I'm tracking into SELL mode. The rally was weak from the very beginning, so I think recent lows should be easily taken out.
To avoid missing the entire down move if drop turns out to be considerable, I opened a minor short position in LVS. LVS was a big winner of the last bull market advancing more than 5000% from the 2009 lows when it was still in penny stock area. It has topped in a spectacular climax 10 months ago when it got more than 100% in 2 months. Since than it has witnessed several failed breakout attempts and broke below MA50 and MA200 many times. I suppose LVS is now ready to give ground. It has been pretty strong during the last mini rally in general merket, but the problem is that I found virtually no other stock to short, which was not too extended below MA50. And I always tend to short stocks as close to their MA50 as possible to keep a safe stop. We'll see how the trade goes.
Regarding gold. The yellow metal yesterday broke into new all time highs. I speculated about a possible double top before, but a moderate volume and not-reversal-looking candle suggest there is still more upside to go. I'm going to keep gold on NEUTRAL signal for now until I see some reversal signals. However, I strongly suggest that anyone still holding gold, silver or miners, uses any additional strength for selling. Personally, I'd just enter a trailing stop of 5% and let it go as high as it wants.

Market Stays Neutral

Yesterday all major indices printed a minor distribution day. Usually, after a wedging rally from lows, a distribution day would put my market direction model to SELL mode. However, this time I'm going to stay a little cautious and wait for another confirmation. The reason being that distribution day was really, really weak. Simply too weak to make any changes in my model. So, for now, markets are still neutral and cash is the king.

A quick look on gold. GLD is almost certainly in the last stages of finishing a climax double top. On largest volume of the last bull move GLD made a nasty reversal candle. It then went to new highs, pulled back and is now testing the highs, but I think most of the selling already happened. A break into new highs would put my gold price direction into SELL mode. For now it is still neutral with a safe stop below the last swing low.

Market Goes To Neutral State

As of yesterday's close my market direction model went to neutral stage. After the sell signal from 2 weeks ago there has been a lot of downside momentum. A short term neutral signal appeared right below the MA200 on Nasdaq but it has been immediatelly negated by more selling. If this reversal is to hold the low of the neutral signal bar should not get violated.

Reversal Coming?

Today all major idexes formed a very strong looking hammer reversal bar on increased volume, suggesting that decline might be over, at least temporarily. After such a strong buying right below the yearly low there is a chance we might see a rally. However, SMI momentum indicator is still convincingly negative, meaning that today's low should at least get tested. Buying into reversals seen today with no upside confirmation is bottom fishing, which is not exactly my style of trading. I would like to see some real upside strength before I get aggressive on the long side.

As for stocks, I'm currently holding my SLV long and CTSH short. I'm keeping a very tight stop on SLV, considering how volatile silver market can be. It looks like CTSH short was a bad call. I'm keeping my stop above 75, but it looks it should be taken out pretty soon. Anyway, I opened this short position just in case market plunges from here. Better shorting opportunities should appear after a rally back to the MA200.

Right now I'm not too interested in the short side as we should see some sort of a bounce. On the other hand, many leading stocks have held high level bases throughout this correction. As soon as the downside market pressure lightens up, these stocks should be the first to break out. If market rallies from here I might consider opening a long position or two just to have something in case today's lows don't get tested. However, I don't intend to invest more than 40% of my account in the long side before market confirms some strength. The best looking stocks in my opinion are CFX, CPHD, GLNG, GMCR, QCOR and RADS. If any of these exhibits some upside momentum, I'll take a little bit of risk and be an early buyer.

More Trouble Brewing

I think the stock market is now in real trouble. The last week, when I was on vacation, has been absolutely devastating for the bulls. The rally that started in mid June has now officially failed as it posted several distribution days from the top, it sliced through MA50 and formed a failed swing low (an ABC reversal). My SMI indicator is showing extreme downside momentum. Actually, I have never seen values below -60 since I keep track of SMI and now we had a -80 and a -100 in one week! I don’t even know what this means for the short and intermediate term price trend, but according to history lessons, I suppose being long now is not a very good idea. Besides, several top glamour stocks have broken down and sliced through their 50 day moving averages. I’ve been thrown out of my RRGB and FOSL longs. I’m still in SLV and EL, but have tighten stops on both issues. In brief, this doesn’t look like a normal market correction to me, but the beginning of a bear market.

Now, after 6 down days we should expect a rally attempt sooner or later. I’m going to monitor every day of the rally very closely. A low volume rally attempt (wedging rally) for me is a sell short signal. On the other hand, if we get a decent volume rally I’ll rethink my strategy and wait with shorting. Additional problem is that right now I don’t see very many low risk shorting opportunities. Most stocks are extended to the downside and I like shorting stocks rallying into resistance, not breaking down. So a relief rally for me is a must.