Friday, January 27, 2012

Gold: A Chart Talk

I woke up this morning to lots of happy talk about gold. Indeed, happy days for gold may again be here soon, but -- peace to Ron Paul and all the other goldbugs out there -- not yet.

I am a gold sceptic. Here's my reasoning:

In the summer of 2007, as housing markets collapsed and people got nervous about the banks, gold began an huge rise from around $660 an ounce to $1,034 by March 2008, only to collapse back to $681 in mid-October.

From that point, gold began a truly epic rise that peaked in early September 2011 at $1,924.

Since then, the price has stairstepped down, hitting the its latest lower low the day after Christmas at $1,524.

Then began the current increase that has the financial chit-chatters all excited, bumping the price up to its current level, $1,738 (so far today).

These are truly big numbers, but they must be seen in proportion.

One reason I'm unwilling to break out the champagne to celebrate gold's "recovery" is because the current level is only a 50% correction of the decline from last September.

Secondly, that decline saw an interim lower high of $1,804 in November 2011. Gold's price is still well below that level.

So on the chart, we have a lower low, and a lower high. That's a downtrend. If the price breaks above $1,804, it would set a higher high and there may be cause for celebration. But that level is 4% away, and cautious traders would require that a higher low be set before the uptrend was confirmed.

Thirdly, the present correction of the rise from 2008 is a mere 15%. The prior correction, of the rise from 2007 into 2008, amounted to 93%.

The two corrections aren't even close to proportional. Now, there's no rule that requires proportionality, but a smart trader will want to see some proof on the chart before accepting a 15% correction as sufficient to mark the start of a significant rise.

Epic advances require epic challenges before the advance continues. Fifteen percent is no epic.

And at that level of analysis, the next higher high that would signify a long-term uptrend is 11% away.

Does that mean stay out of gold? Not for my account. There is money to be made in these short-term moves. There's money to be made in moves of an hour or half-hour, for that matter.

But the days are not yet back when a trader could buy gold and hold it for months and years as the profits rolled in.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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