Please don’t shoot me as I’m just a messenger from the front lines of the PM bull market. Last weeks big decline did some technical damage to gold, silver and alot of the PM stocks. When we get a break of that magnitude one has to take notice and look around to see if things are still the same or has something fundamentally different happened. From my perspective a big red flag went up when we made a lower low on gold taking out the previous bottom like it wasn’t even there. Last weeks move down felt more like an impulse move and not just a reaction in the uptrend channel. So in that light I was looking for a counter move up, to the underside of the bottom we broke out of last week, for confirmation of a trend reversal. This weeks rally took us all the way back up to just under the previous bottom area where we met stiff resistance the last 2 days. Todays action confirms what I have been thinking with the big move down currently taking place with GLD.
We will start with a 60 minute look at GLD. There are alway clues in my type of TA, which is mostly looking at chart patterns, and trying to interpret the patterns meaning. First notice the little H&S top formation that started the big decline last week. It didn’t look like much but it was enough to reverse the uptrend to a downtrend and start this whole declining process. Next notice the brown horizontal area that I have labeled as resistance. It was support but when we took out the lows last week it reversed its role and should now becomes a resistance area. The game has changed now, instead of making higher highs we are now in the process of making lower lows which is a downtrend. Just trying to keep things simple in here. One last thing to note on the 60 minute look. Notice where we are getting our bounce this morning, right off of top of the triple bottom we put in last week.
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Next we will look at the daily action and see what is happening from a longer term perspective. First we can make a case for a 5 wave sequence up that ended with our little H&S top that I showed on the 60 minute look. Remember H&S patterns are reversal patterns for the most part. Next look at the magnitude of the decline from that H&S top and compare it to any decline within the 5 wave uptrend channel. This last decline took out the previous low at the point labeled BO, which I’m labeling as wave A down. We have been in a wave B up this week which should stop at one of the Fib retrace points labeled in black. So far we have made it all the way back up to the 1st fib retrace at 38% = 93.87.
I have one more set of Fib retracements for the big wave 1 of III labeled in red. Now we can look for areas of support around one of the Fib % retracements for a wave 2 bottom and a start of our wave 3 of III.
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Next we will look at the HUI and how last weeks action did some serious technical damage and what are the implications going froward.
First we will look at the 60 minute line chart that takes in the whole rising wedge formation. When you look toward the end of the rising wedge you can clearly see the near vertical drop from the top of the wedge to and through the bottom of the wedge. We put in a small double bottom that gave us the current strength to rally up to the bottom rail of the rising wedge in a backtest. We are now in a most critical area where if you believe a larger correction is going to take place now is the time to buy some put insurance. If you can endure the pain and are a long term investor just forget about it. I personally have been using this strength to buy some insurance for a possible significant down trend that maybe just getting started. This backtest that we are now experiencing maybe the last good opportunity to buy some insurance and help ease the pain if this correction in the PM stocks starts to get ugly.
If we can claw our way back into the rising wedge pattern and close above the low at 470 I will go to neutral and wait for further developments.
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I know that this post is not the most positive post I’ve done in awhile but things are what they are. I have no control of what is developing in the markets and all I can do is try and be in a position where I will be able to take advantage of this drop, if that is what is in the cards, and load up at the bottom with some insurance money invested in this general area, now. soee is right on the money with buying some insurance to help ease the pain in a counter trend move in a bull market. As we have seen from last weeks big move down the pain of having no insurance might get the better of you when we go probing for a bottom no matter how strong of a bull you are.
All the best…Rambus