In late June, our analysis indicated that gold had declined to a level at which technical conditions were conducive to the development of an oversold reaction. Following two weeks of bottoming behavior, gold closed moderately higher today, moving up to a new short-term high for the oversold reaction from June above congestion resistance in the 1,250 area. A subsequent daily close well above the middle of the Bollinger bands at current levels would reconfirm the oversold reaction and forecast a move up toward congestion resistance at the 1,350 level.
Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency, has also reacted sharply off of its comparable low in June. Additionally, a slight positive divergence has developed between the GCI and gold in US dollar terms during the last several sessions, favoring a continuation of the rebound.
With respect to cycle analysis, the move well above the last alpha high (AH) during the beta phase rally signals the likely transition to a bullish translation and favors additional short-term strength.
The cyclical downtrend from 2011 has been declining at an unsustainable rate since breaking below key support at the 1,550 level in April. Unsustainable declines of this character are usually followed by a violent oversold reaction and the strong advance this week indicates that the anticipated rebound may be underway.
As always, the formation of a meaningful turning point is a process, not an event. The transition of the short-term cycle to a bullish translation is an important step in the potential development of a significant intermediate-term low, but it is only one step of several. The next step could occur as soon as the next session, so it will be important to monitor price behavior closely tomorrow.
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