Violent Oversold Reaction Continues in Gold Market

| August 15, 2013


In June, we observed that the cyclical downtrend in gold was declining at an unsustainable rate following the trading range breakdown in April. During the final week of June, our analysis indicated that prices had returned to a level at which the development of a potentially violent oversold reaction was likely. As expected, an intermediate-term cycle low (ITCL) formed during the second week of July and the strong advance during the last six weeks suggests that intermediate-term cycle translation is in question, indicating that a long-term low may be forming.

As always, it is important to remember that a long-term bottom is a process, not an event. It is too soon to know if a cyclical bottom is forming, but a development that would greatly increase the likelihood of the bottoming scenario could occur as soon as tomorrow. Therefore, it will be imperative to monitor price behavior closely on Friday for this potentially bullish development.


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In June, we observed that the cyclical downtrend in gold was declining at an unsustainable rate following the trading range breakdown in April. During the final week of June, our analysis indicated that prices had returned to a level at which the development of a potentially violent oversold reaction was likely. As expected, an intermediate-term cycle low (ITCL) formed during the second week of July and the strong advance during the last six weeks suggests that intermediate-term cycle translation is in question, indicating that a long-term low may be forming.

Following the strong oversold reaction in July, we noted that the next important technical objective from a bullish perspective was a daily close above congestion resistance in the 1,350 area. Today, gold closed above this key resistance level. A subsequent close well above current levels would confirm the breakout and forecast additional short-term strength.

Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency, also closed above its comparable resistance level near 35. Technical indicators are moderately bullish overall on both daily charts, favoring a continuation of the uptrend from June.

Further supporting the bullish scenario is the development of an ascending triangle formation on the daily chart of gold. An ascending triangle is a bullish technical formation and a confirmed break above the upper boundary of the triangle at the 1,350 level would favor a quick return to congestion resistance in the 1,475 area.

From a big picture perspective, the question remains whether the intermediate-term low in July will also prove to be a long-term low that marks the termination of the cyclical downtrend from 2011. As always, it is important to remember that a long-term bottom is a process, not an event. It is too soon to know if a cyclical bottom is forming, but a daily and weekly close well above the 1,350 level would greatly increase the likelihood of the bottoming scenario. Therefore, it will be imperative to monitor price behavior closely tomorrow for this potentially bullish development.

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Category: Commentary, Market Update


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