A Technical Look at Gold

10:30pm CST

Why has gold broken down so sharply this week and what are the implications moving forward? I am sure that is a question many of you are asking right now and I’m going to do my best to answer that question.First I would like to examine the evidence at hand.

As you can see from the chart below gold closed below its 150 day moving average for the first time since mid-January 2009.

Here is a close up of the chart above with the 200 day moving average as well. As you can see both moving averages held on a closing basis back in September. The story is completely different in the past few days.

In addition, it doesn’t matter how I draw the trendlines from the bottom in October 2008, the uptrend is broken.

Now that we’ve established that the uptrend is broken let’s look at potential support. I first want to focus on the 12 and 20 month moving averages. Note that since the bull market began in 2001 the 12 month moving average has typically held on a closing (month end) basis and if it didn’t the 20 month moving average held as support. The only exception to this rule was 2008. The 12 month moving average was tested today and currently stands at $1575. Should the 12 month moving average not hold the next presumption would be a test of the 20 month moving average at $1464.

Here is my cheat sheet of support levels for gold. Allow me to explain each that I haven’t already covered.

Support Levels for Gold

$1575= 12 Month SMA/38% Retracement ($1924-$1045)

$1564= Wave C = .618 x Wave A from September High

$1545= Potential Target for C Wave that began at $1804

$1484= 50% Retracement ($1924-$1045)/Beginning of Parabolic Move in July 2011

$1464= 20 Month SMA

$1449= 38% Retracement ($1924-$681)

$1433= December 2010 High/Regression w/ 5 Touches since high of $1034 in March 2008

$1415= Wave C= Wave A from September High/Potential Target for C Wave that began at $1804

$1370= 62% Retracement ($1924-$1045)

$1302= 50% Retracement ($1924-$681)

Here are some basic potential corrective waves from $1924.

A= $1924-$1535= 389

B= $1535-$1804= 269

C= .618 x A @ $1564

C= A @ $1415

Note that today’s low was $1566 or just $2 above this C wave projection. The problem with that scenario is that it assumes that wave C is truncated, or in simple terms it doesn’t exceed the A wave as a C wave should. Now if I assume that the Wave C= A, I come up with a downside objective of $1415. The $1415 scenario would seem a bit more plausible at the moment since the trend has just broken and moving down to $1415 would move gold down below the 38% retracement of the move up from $681 to $1924 (which is $1449).

Now here is the potential internal look of the C wave. Take note that the targets generated here ($1545 and $1408) are similar to what the larger wave projects ($1564 and $1415). Also note that I have not drawn out a hypothetical path for this wave c of C. I have only given numbers. One last point here but the fact that gold moved below the key $1680-$1700 range (down to $1667) is what gave me pause and told me it was time to hedge my position which I did on the rebound after Thanksgiving around $1712.

A= $1925-$1535

B= $1535-$1804

C= See Below

a= $1804-$1667= 137

b= $1667-$1767= 100

c= .618 x a @ $1545

c= a @ $1408

Here is a regression that I have been watching for quite a while now that dates back to the high of $1034 in March 2008 when Bear Sterns went under. It comes into play between $1433 and $1449 which are key support levels as noted in my cheat sheet above. The high of December 2010 and the 38% retracement of the bull run from $681 to $1924. A retracement to this level would put any long positions established in 2011 under water. This is what corrections are supposed to do….remove weak handed investors that piled in at the end of the move.

Tonight I want to look at what I see as the 3 highest probability wave counts for gold. Both of my counts are bullish. The only difference is that one assumes that this correction doesn’t have much further to go in terms of time or price. The other would suggest that gold is in a corrective period that could be similar to 2008 in which case the bottoming process may not conclude until April 2012 which is 7 months from the high of September (the 2008 correction began in March and ended in October). Note that April 2012 is one of my 9 month cycles that I mentioned the other day. The other count belongs to the Alf Fields (who is well known among gold bugs) and his count is mega bullish.

Here is an update to the wave count I posted on 8/28/11. When I originally posted this count on 8/28/11 I was not expecting gold to go back below $1700 and that read was proven wrong in late-September and where we are today. In other words I was expecting a high level consolidation for the wave (iv) and then a final parabolic burst to finish off wave iii of 3. This count still has merit. If it is correct, gold shouldn’t move back below $1464-$1484. Those are key support levels that must hold to maintain this count. Any correction beyond those levels would suggest that the next count is in play.

http://equitybriefcapital.wordpress.com/2011/08/28/why-gold-isnt-in-a-bubble-updated/

Here is my alternative count and it gains merit on a drop below $1464-$1484 but holds $1302-$1415. The way I have counted this since the 2008 low is the exact same as Alf Fields. The only difference of opinion is the degree of the wave as you will see in the next chart. If this count is correct and is of the same degree as 2008 a good target would be around $1365-$1400. The 2001-2008 gold bull ran from $255 to $1034 and then corrected back to $681. The 38% retrace was $736 and the 50% retrace was $645. The total retrace of 353 of 779 points was 45%. Using that same ratio from $681 to $1924 I come up with $1365.

Ready to have your socks blown off? This is the count of the well known Alf Fields. He is suggesting that price wise once the market bottoms in the not too distant future that we will enter wave iii of 3 or the mid-point of the secular bull market. He expects wave iii of 3 to reach $4500 with two corrections of 13% along the way.

The uptrend has broken and it will take some time to repair. Based on the way that things look right now I’m guessing that $1464-$1484 is probably a good target range for a bottom. On the other hand, if it can hold the September low of $1535 gold could be setting up for a double bottom (wave (iv) flat?). I have given all the scenarios that I am aware of and will keep you all updated on my thoughts regarding gold. Bottom line is that I still believe in the secular trend. The only question is of what degree this correction will be. That can’t be answered until we get more evidence which means that I need to see more price action.

Earlier today I mentioned that I wouldn’t be surprised if the Chinese Central Bank/Sovereign Wealth Fund stepped into the gold market. Frankly, I wouldn’t be surprised if a lot of the stronger central banks are buying here. It will be interesting to see if sometime early next year we find out that some central banks stepped in and began buying below $1600. That could put a bottom in for the gold market in a hurry. I have mentioned recently that each of the past two years has seen gold put in an important bottom in February. Will February 2012 be 3 in a row?

The technicals don’t look so hot right now but the fundamental case is as strong as ever as the most bullish cases for gold involve different kinds of counter party risk:

1. Lack of confidence in the financial system- Do you trust your counter-parties? Are banks skeptical of lending to each other. MF Global was a big hit to confidence in the system in my eyes. The initial results may be deflationary but the eventual policy responses will be inflationary.

2. Lack of confidence in governments- Do you trust your government to do the right thing financially? That piece of paper you are carrying in your wallet is nothing more than an IOU printed on a piece of paper which is only worth something because the government says that it is.

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