Poster’s Paradise

This is a good place to review the events form the last couple of weeks pertaining to gold. Lets start with that Sunday night on March 16th that started the beginning of this current correction. The reason I keep going back to that Sunday night is because that night was marked with such optimism, with gold being up over 30+ dollars and the Bears Stern thing starting to unravel, it was time to put on the party hats. Well everyone knows what happened the next day. We gave up just about all our gains and closed that Monday down at the bottom of the daily range, leaving a big long tail on the daily bar, sticking out like a sore thumb on the charts. Contrast that night to the carnage of our August 16th low on the HUI. The pessimism was so thick then you could cut it with a knife. The March 16th top was complete euphoria and the August 16th bottom was complete panic. Those two emotions rule the markets and to be able to identify them, even after the fact, will go along way in understanding the game we are all playing.
Anyway, after that euphoric Sunday night on March 16th, our current correction was born. That long tail that was created on Monday was the very first clue that something might be amiss. We still had no clue of how bad this correction might be but there was a sign that a trend reversal was probably at hand. Looking at the 60 minute chart of GLD we can see from a technical perspective, a small H&S top being made at the precise time everyone was being so bullish. The initial decline took only 4 days to wipe out 128 points from gold and in the process we took out the early March lows at 960 giving us another big clue that this correction might be bigger than what we might have been thinking at the time. The 60 minute GLD chart shows the little H&S top and the breaking of the early March lows. Another important thing to see in looking at the 60 minute chart is the progression of lower lows, a must if you are going to have a downtrend.

Lets look at the daily chart of gold now and see what has developed over the last 2 1/2 weeks in regards to the trend reversal. I have a horizontal thin black line that projects from the early March lows showing where we might look for the counter trend rally to stall out. Sure enough the counter trend rally faded out just under the March lows, just where you would expect from a technical perspective. Why this is so important is because it now sets up an even bigger H&S reversal pattern by creating a right shoulder. Yesterday’s $30 plus drop in gold was significant in that it broke the 1st neckline of a potential double neckline H&S reversal pattern. I always look for a big day in price when a breakout occurs and yesterdays breakout of 30 points fits the bill.
I have labeled the 2 necklines, NL#1 and NL#2 on the chart below to show the possible double neckline top that is still maturing. We can expect a good counter trend rally off of NL#2 to find resistance under NL#1 but in this case I can see us going up through NL#1 by a small margin to offer symmetry to the left shoulder of NL#2, small s. I don’t want us to violate the previous high right shoulder top at 960, as that would throw this whole scenario into question by making a higher high. If we are truly in a downtrend then 960 should not be violated.

We will expand the daily chart in time to 1 year and put this H&S top into perspective. First notice the uptrend that proceeded this H&S top, higher highs and higher lows all the way up. Now look at our downtrend so far, lower lows and lower highs in place. There is no great mystery in what I do with these charts, its all based on simple TA and anyone of you can do it. In my opinion, simple TA is good TA. It doesn’t have to be hard and complex as some TA guys would like you to believe.
Symmetry is one thing I find fascinating about charts. It seems alot of the time what happened on the way up will have a direct affect on what will happen on the way down and that is why I’m looking for one more small right shoulder to form on this next counter trend rally to match the first left shoulder on NL#2, small s.

People say that charting is a backward looking tool and to try and gauge what may lie ahead in the future, using chart patterns, is futile. I will agree that you can’t predict every little twist and turn a trend makes but you can get a good feel of direction and price objectives. On that note lets see if we can measure out the H&S top formation and come up with a price objective for the downside. First, this H&S is a bit complexed in its construction with the 2 necklines but we can still get a good feel of where this top is suggesting for us to look for a price objective. To measure a H&S top, all you have to do is measure from the top of the head to the NL and take that measurement down to the breakout of the neckline to get your price objective. I like to measure from the top of the head to the point where the neckline and right shoulder intersect. As we have a double NL we will have 2 price objectives for the downside. The 1st neckline measurement will look like this: top of head 1033 minus contact with NL 905 = 128 points. 128 points minus the breakout of NL at 908 = price objective of 780. What is neat about that price objective is that it comes in right at the bottom of our triangle pattern that was formed on the way up. Remember me saying awhile back that what happened on the way up will affect what will happen on the way down. I have drawn a horizontal line across from the bottom of the red triangle pattern all the way to the right side of the chart to show where this H&S price objective measures out to. I like it when we have confirmation from another source of information to add credence to our price objective.
As the NL#2 H&S is alittle bit bigger than NL#1 H&S we should have a lower PO. So, 1033 minus 879 = 154 points minus the breakout of NL#2 at roughly 880 gives us a price objective of 726.
So now we have 3 areas to look for a possible bottom to come in. First, NL#1 measures to 780. NL#2 measures to 726 and the bottom that held support during the construction of the triangle pattern also at 780.

Now, I would like to speculate in here for those that are open minded and not afraid to look into the future for fear of what they may see. First, at this point in time, this is pure speculation on my part as we don’t have enough clues yet to make any concrete forecast. But, if things start to unfold, as I have laid them out here in detail, we must be prepared for the possibility of a much larger H&S pattern that would have dyer consequences for the bull market as we know it.
Some of you more technically oriented folks may have noticed that red triangle pattern in the last uptrend and the possible relevance it may have to our current downtrend. As I have stated earlier, markets like to have symmetry. WHAT IF the H&S top measures out down to our 780 area where we find support. WHAT IF the rally that ensues off of that 780 bottom goes up 75 points or so and then turns back down building another triangle or consolidation patten over the next several month. Are you starting to get my drift? What we would be building at that point in time would be the right shoulder of a much larger H&S top. If we measured the bigger H&S top 1033 minus the NL at 780 = 253 points minus the breakout at 780 = a price objective down to 527. What is fascinating about that is, if you recall the bull market in the 70″s had a correction from 200 to 100 before the real bull market took off shaking off all but the truest believers. If we had a similar correction today off of the high at 1033 we would get an equivalent move to 516.5 just 10 points different than what our H&S is predicting.

This post isn’t designed to frighten or scare you into selling your shares but to give a heads up in plenty of time to do something if you choose to. Things could change and this scenario may turn out to be a pipe dream, which I imagine many of you are thinking right now. And that is fine. All you have to do is follow these charts for clues as to whether we reach our H&S po at 780 and what happens after that. Does the bounce off of 780 have legs and rallies back up far enough to nigate the H&S or does the rally fail after 75 points or so and we start to form a consolidation pattern around the 780 NL. We will have clues as to what is happening in real time and we shouldn’t be caught with our pants down if we just watch this scenario I’ve just laid out for you.
There is one more point I would like to make regarding herd participation. The Tent has been conducting a poll on where this correction will end. I find it most interesting form my perspective. The herd is saying we don’t correct any farther than 850. Almost everyone is in agreement with that scenario, which form my point of view, as a contrarian, we will probably not see 850 hold. This is a very important point about being with the herd and the poll has brought it to light for everyone to see. Now would be a good time to go back to the beginning of this post and reread the first paragraph on the emotional aspects of this game we are all trying to understand.
I hope this post doesn’t upset anyone because that is not the intention. The intention is to inform and bring to light a possible outcome that many are not even entertaining a thought as to WHAT IF.
All the best to everyone under the tent, PEACE…Rambus

PS: This tent is a long ways away for coming apart at the seams. I find it very educational in many ways, with many viewpoints on many subjects, all presented in an open and honest way. The tent is unique in many ways and that is its strength.