I am stood aside gold futures but have just revised my tech analysis now that Friday's low has almost taken out the 1st April low. I now expect gold to go to 798 ish (basis futures) for a significant reaction at that level.

We have 3 technical indications which align almost exactly. The 50% retracement from the Oct 06 low which I read to be a wave 2 of some degree, the 1:1 symmetry from the swing down from the March 08 high to the 1st April low and back up to the lower high made on the 17th April. And most importantly this level goes right through the middle of a W.4 high horizontal volume node created during the balance period in mid nov to mid dec 07. This should theoretically provide formidable support and for a bullish scenario could well prove to be a low of considerable significance. Pattern from the March high is now looking like a potential simple ABC correction. The B being at the 956 high.

My trade strategy will be to watch pattern formation very closely if and when price approaches the 798 area. A tolerance for the level would be around 783 to 812. If the market bounces well I will look to position long as soon as momentum confirms and place a tight stop at a logical level. I will then trail my stop as price works its way up allowing room for the swings I would expect. Only if price then exceeds the March high will I feel more confident about my bullish count.

You can tell I have studied the bullish count potential for this "correction" I think we are witnessing. But I always make a habit of looking for 3 alternate counts and if gold has instead started a long term bear trend I shall be alerted if price reaches a level below 755.7 and then below 742.8. The bearish technical count would be pretty ugly to say the least and if and when that may start to look a high probability I would start to look for short trades on the metal.

The third alternate count scenario would be that we have started what could transpire to be a long "complexed" correction which basically drifts sideways ad infinitum. Much as the stock market can lose value by travelling sideways for several years whilst the USD does the work trending downward.

I hear traders exclaim

oops, didnt finish

I hear traders exclaim outrage at the stock market's rally up from the 02 lows. Won't go into the fundamentals reasons for their outrage here. I think the intelligent readers who follow this site will understand. But when you actually take account of the USD depreciation you realise the stock market has effectively been in a bear market all that time it worked its way up to an apparent high in Oct last year.

If gold approaches my 798 area I shall also be alert to possible synchronisation in the timing of this technical level with various bull/bear sentiment indicators. Seems to me that the markets as a whole eventually become impervious to a continuous flow of negative news and start to react irrationally. Don't we just know that ! the recent rally in stocks in the face of evergrowing bearish revelations is but a small example of that. I guess I am influenced by gold's ability to become the safe haven of all safe havens.

David.

Hi David

Thanks for your very interesting and well argued post and allowing us the benefit of the conclusions you have drawn.

You may have gathered that we are not among the most enthusiastic supporters of technical analysis, particularly in the gold and precious metal markets. We have, however, to keep reminding ourselves that there are a multitude of funds and investors whose trading decisions are based entirely on strategies derived from the study of technicals. We would not argue the point that interpretations of chart patterns frequently have the ability to substantially move the markets, particularly when a clear longish term trend is apparent. We also believe that some markets are more likely to be moved in the direction indicated by the charts than others.

Perhaps we should also admit to a sneaking use and appreciation of candlesticks when foraying into the forex markets for some fast action.
With our opinions in mind we feel that gold prices, with silver tagging along, are and have been for at least the last six months, far more under the influence of fundamental developments.

If, as many believe, there is even more bad news to come from the financial sector, would you not be expecting gold to push back up to the $1000 level despite the Fed holding steady on interest rates?

For instance, what if the Chinese decide to dump a sizeable proportion their massive dollar holdings and build up their gold reserves? It is already on record that they are intent on stocking up on gold, and their sovereign fund may have difficulty in being allowed to get much more of a foot in the US under a new administration. With the Beijing Olympics out of the way we may find the Chinese a very different ¨kettle of fish¨ to deal with.

Then there are developments in Oil, the OPEC nations, South Africa, Russia, Iran, N Vietnam, politics, currency markets, the IMF and so much more that can have an immediate effect on the gold market irrespective of any of the conclusions drawn from historical price movements.

Having expressed our reservations about technical analysis we do agree with you that there is likely to be a continuing correction but feel that $850 may provide a floor. Break through that and the anywhere in the $700s may be the next support level. If that situation is reached we believe that it will be due to fundamental reasons with the technical arguments just being coincidental.

We do not expect the gold market to drift sideways unless it continues to stutter between around $900 or slightly lower and $950 an ounce for a time.
We will be adding to our position if the $850 level is reached and maintained for a period. In the meantime we are giving serious thought to buying at today’s levels and playing tops and bottoms if it becomes evident that, say over a period of two weeks that there is buying support within the range.

We remain confident that gold will break through the $1000 barrier and, subject to the expected corrections, power up to $2000 plus when it becomes apparent that Western economies will run out of short term fixes within the next two years.

We should also add the rider that if the US, UK and Europe show signs of decisively fighting the consequences of their current politically inspired inflationary policies by putting interest rates up very substantially, we will bail out of gold ¨tout suite¨.

As an afterthought, should your analysis prove correct it will provide a great opportunity to load up on the best of the senior miners as there always seems to be an over reaction when gold moves, particularly downward, and that extra leverage they provide can open the door to added profits when the market reverses back up.

One thing we are sure about is that your post will give our visitors a great deal of thought as it has to us, and that is one of the principal purposes of this investment site.