It might have surprised some readers that several weeks ago (August 20th), we suggested gold was putting in a short-term top. Understand, we think this is just a normal correction in an ongoing bull market. It is vitally important that you keep the bull market in mind.
Why? Because this will be an opportunity to get on board if you have not done so already. Corrections in a bull market are not tragedies, they are opportunities.
Why did we feel a correction was due and now why do we think it has started?
The reason we felt a correction was imminent was that gold had become overbought in term of sentiment, in terms of momentum, and in terms of futures and speculative positioning. All three coming together made a compelling case and it appears we were indeed correct.
In addition, note that the momentum indicators (lower charts) actually rolled over as gold was making this second head of a top formation. That is a serious divergence.
So, we have been waiting for a correction for the past few weeks hoping for a buying opportunity with prices in more of a bargain zone. With that in mind what is a likely target zone to do some additional buying?
As the chart suggests, yesterday (September 10th) gold broke a small head and shoulders pattern top. This would imply a target in the $1440-1450 range.
In addition, a series of previous tops (see blue rectangle) comes in around the same level. The 50-day moving average also comes in slightly above that area. So, it is likely the market could see at least this area for likely support and consolidation.
Corrections like these are not only normal, they are quite healthy. It allows speculative excess to be worked off and allows for the bull market to have more time and more room to run on the upside. What we want to see is sentiment, momentum, and futures positioning improve, if and when we get into the price zone suggested by multiple systems of analysis. Right now, the preponderance of the evidence suggests at least a test of the zone we are suggesting.
A lot will depend on how our indicators look when and if we get in $1400-1450 zone. We will keep you informed.
With deficits exploding, and no political will to reign them in, gold is looking good. Central bank purchases continue to be supportive with ultra cheap money policies being pursued by all central banks.
A growing and ominous debt bubble, instability in China, and soon the Presidential political cycle all suggest further attempts to stimulate the economy and a pre-preemptive attempt by the Fed to forestall a recession.
Gold remains in a bull market. The way to approach it will be to buy the dips when the opportunities are presented. An attractive dip should be coming up in the next few weeks and now you have at least a target to look for when making your next purchases.
Gold should first and foremost should be viewed as financial insurance and an important diversification.
Charts courtesy of Stockcharts.com. Comments are derived from sources believed reliable but results cannot be guaranteed.