Overall, this is just a normal cycle correction in a new bull market – prices should bottom in November or December.
If you study the markets long enough, you’ll begin to recognize a cyclical nature to virtually everything. Financial assets rise and fall with the business cycle. Agricultural commodities are subject to weather patterns and drought. In gold, you’ll notice prices seem to base about every 6-months.
THE GOLD CYCLE
Below is a weekly chart of gold from 2007 to 2012. The blue arrows represent each 6-month bottom. Not every cycle is equal, but there is a definite cadence to the lows. In bull markets, prices make higher lows.
The correction into each 6-month low is usually filled with a few twists and turns. Typically, you can divide the entire correction process into four stages.
- Stage 1 (The Cycle Top): Gold has rallied at this point for several weeks; bullish sentiment is high. However, a more in-depth look reveals weakening underlying momentum portrayed by negative divergences in the MACD and RSI. Eventually, prices peak, and we mark the cycle high.
- Stage 2 (The Topping Process): The uptrend is showing signs of weakness, but it’s unclear if prices topped. Sentiment remains firmly bullish with most traders still positioning for new highs – many overleveraged. However, the market is running out of buyers – rallies decay and prices fail to maintain new highs.
- Stage 3 (A Top Acknowledged): After a couple of failed rallies, bullish sentiment begins to wane. The bears, once timid, start to grow in confidence. It’s at this point we can see a sharp down day as overleveraged traders acknowledge a trend reversal (sometimes all at once) and race to the exits. The bulls stop looking for new highs and begin looking lower.
- Stage 4 (The 6-Month Low): Prices have declined long enough and deep enough to drive sentiment from bullish back to bearish. Everyone that was expecting new highs at the top is now calling for new lows – some are even shorting the market. Our Gold Cycle Indicator is below 100 and in bottoming territory. Ideally, we’ve seen at least a 50% reduction in commercial net-shorts from the peak.
THE CURRENT CYCLE
I believe we will transition into stage three (described above) once gold breaks the October $1465 low. Commercial net-shorts remain elevated at -310,492. Our Gold Cycle Indicator (currently 237) should dip below 100 when conditions are consistent with minimum cycle bottoming.
After this cycle bottoms, a new sequence begins – rinse and repeat. Some corrections are more profound than others, while some are unusually shallow. The market throws a curveball occasionally, to keep traders on their toes. We have a minimum target of $1410 – $1420 and see the potential for a backtest of the June $1380 breakout area.
AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For more information, please visit https://goldpredict.com/
This article was originally posted on FX Empire
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