Wednesday, September 2, 2009

The Golden Triangle – Breaking Out…

Gold is breaking out of a months long consolidation triangle today. Beware of a headfake, I will stop out on short term positions on a pullback inside the triangle, but otherwise see this triangle as bullish with an upside target slightly over $1,300 an ounce. Below is a chart of the gold futures /YG:

Below is a chart of the dollar futures /DX. It too has been making a triangular pattern, but it is more of a declining wedge, a pattern that could easily break up, but could also break down:

Keep in mind that the dollar is simply compared to a basket of other currencies… if CONFIDENCE is lost in fiat in general, then gold and other precious metals will increase in relative value - that may be the message we’re getting now.

Here’s a chart showing about the last year in GLD, the gold ETF. Note the low of 66 and the high of 99, there are those numbers again, and the difference is 33, a 50% increase of 66 and a one third proportion of 99. Isn’t math fascinating? Why do those ratios and numbers appear so often? At any rate, you can see that we are clearly breaking above this triangle today – watch that breakout carefully if you go long on this signal:

Something to keep an eye on is the volume pattern. Note from the charts above that volume has been tapering off during this consolidation. To confirm the break higher I want to see volume come up. Also watch the oscillators, the daily stochastics are overbought, but of course they can stay that way for quite some time.

Here is a close up view of GLD daily, note the gap up (not present in the futures), the gap makes me a little nervous, but this is an ETF, so the gap doesn’t necessarily have to be filled, although most are eventually:

Below is a chart of the HUI, the Gold Bug’s Index. It has not broken out of its triangle as of yet, but also should be watched closely to see if the miners are following:

Below is a longer term chart of Gold. Note the very clear inverse Head & Shoulders pattern. The target on that pattern is the same as the pennant/triangle, just above $1,300:

The Gold P&F now has a bullish price target of $1,000 an ounce. I would consider that a short term target at this point

Check the chart above again… note that I included the SPX behind the price of gold. There is a disconnect occurring here between the two. Gold bottomed BEFORE the SPX did in March and has been leading it ever since, a relationship that is not always present. Also, gold possibly making new highs while equities are still down 40%+ is very telling about CONFIDENCE.

If you look at a chart of gold during the Great depression, it did NOT do the same thing – that makes this crisis different – more severe I would contend. The greenshoot tokers will be yelling “inflation” but what I’m seeing is NOT inflation, it is a loss of confidence, the type of thing that changes nations.