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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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 Posted: Sat Jan 20, 2007 2:07 am Post subject: Commodity Markets Review - Gold, Silver, Crude Oil & Cop |
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As an investor, what matters to you more than anything, what is of paramount importance, is determining whether what you have invested in, or are thinking of investing in, is going to go up, down or sideways. If you are long you want the market to go up, if you are short you want it to go down, and if you have written both Call and Put options, you want it to move sideways. All consideration of fundamentals is subordinate to this Prime Objective.
Gold, Silver and Precious Metals stocks have been trading sideways for about 9 months now, following their strong advance to the April - May peak of last year, with many smaller stocks having slithered down a "slope of hope" to plumb low levels in the recent past. Understandably, many investors in the sector are growing increasingly fed up and frustrated with this situation, especially as every time the sector looks set to break higher it has suffered a smackdown. The purpose of this essay is to assess the current situation and to discuss effective tactics for dealing with it.
We are going to look at a broad range of charts in this article, because the Precious Metals sector does not exist in a vacuum - its fortunes are linked to the performance of other commodities, such as base metals and oil, and to trends in financial instruments such as T-bills and T-bonds, and of course to the mighty US dollar.
We will start by looking at the 1-year chart for Gold, which enables us to examine the entire sideways pattern from the peak last May in detail, and to put recent action into context. On this chart we can see how early this year gold broke down from a small Head-and-Shoulders top that started to develop from early November, an event that was predicted on www.clivemaund.com as the price went into the Right Shoulder of the pattern, only to abort the pattern last Friday by breaking back strongly above the neckline, which we sidestepped by closing out short positions on Thursday. Due to this action gold finds itself once more rangebound between support at and above $600 and resistance at $650 - $655. So how does this recent action fit within the larger picture going back many months?
Some other writers have advanced the notion that what is known as a "High Level Head-and-Shoulders Bottom" may have formed between the middle of last July and the present, and this has been tentatively marked on the chart. This pattern is so called because, unlike a normal Head-and-Shoulders bottom, it is not preceded by a drop of any significance. This theory is credible because the drop this month stopped EXACTLY at the low of last July so that the low of the Left Shoulder is at exactly the same level as the low of the Right Shoulder. The Head-and-Shoulders is a variant of a rounding turn and is thus related to formations such as Cups and Saucers. The curved line on our chart shows the gradual change of trend from down to up, and reveals that this Head-and-Shoulders can be said to have followed the decline from the peak last May, despite the intervening crevasse, although this does not mean that it cannot break down from here.
Having considered recent action on the 1-year chart, we will now look at a 6-year chart that shows the bullmarket in gold from its inception, and as we will see this chart provides a completely different perspective from the 1-year chart. An arithmetic scale has been selected for this chart for two reasons; one is that we get a better trendline fit - the 2004 low touches the trendline on the arithmetic chart, but doesn't on the log chart, and the second reason is that the arithmetic chart makes it clearer that the high of last May was a "blow off" top that called for a lengthy period of consolidation at the least, which we have had, and may mean we are in for a deeper reaction back towards the trendline, which would make the entire period from the May high through to the present one long top area.
Note that on this long-term gold chart we have switched from our customary 200-day moving average to a 300-day, for as we can see, this provides a better fit. The price has rallied from the vicinity of the 300-day moving average throughout the bull market, and therefore the current position of gold just above this average does put it in position to break higher, going on the basis of this factor alone.
So, on the one hand, we have gold completing what looks like a High Level Head-and-Shoulders Bottom, with the price in a favorable position relative to its 300-day moving average, from which it has rallied throughout its bull market, and on the other hand it is still way above its long-term uptrend line on the long-term chart, and this is the case whether you use an arithmetic or log scaling, so that the pattern that has formed since the blowoff top last May could be a large top area projecting the price back to the trendline, which would involve a huge drop back to the $480 - $500 area. In attempting to arrive at a conclusion about which way it is likely to break, there is fortunately additional evidence available first from the Silver chart and then from the commodity sector as a whole that can help throw light on the situation.
Full article - http://www.marketoracle.co.uk/Article234.html |
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