martes, 16 de abril de 2013

martes, abril 16, 2013

Getting Technical

MONDAY, APRIL 15, 2013         

Gold May Be Near the Bottom

By MICHAEL KAHN

Many technical signs suggest that the price of gold is about to hit the floor, but it's got so much downward momentum it could go straight to the basement.
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Gold is getting dusted. After rallying for more than a decade, prices have fallen through a trap door into bear market territory. While this label only tells us what has happened and not what is coming, it does underscore the prevailing trend—down.

The question is whether prices are low enough to suggest a bottom is in. Given the body of technical evidence from trend to momentum, the answer is that it could be. The problem is that, with volatility so high, it is dangerous to place bets in either direction right now.

The carnage began in earnest Friday when gold futures dropped below a key support band between $1,520 and $1,530 an ounce. This was derived from the bottom of a two-year trading pattern (see chart).

Chart

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Classical chart analysis says that both the long- and short-term trends are down. Using a simple technique of measuring the vertical height of the range and projecting it down from the breakdown point, the $1,275 level is indeed a reasonable goal for the bears. Given that the metal traded at $1,355 Monday morning, that target is already within view.

Moving to a more esoteric method of finding likely support levels, there are two major Fibonacci retracement levels converging in the $1,300 area. Derived from the Fibonacci series of numbers in mathematics, it is not uncommon to find market turns occurring at key percentages of 61.8 and 38.2, as well as at the 50% level.

The bull market began in 2001 with gold trading near $255. A 38.2% pullback from its 2011 peak at $1,923 would be $1,286. And a 50% retracement of the rally that began at the end of the major decline in 2008 would be $1,302. Those two numbers round to about $1,300, and that is not far from the classical downside projection of $1,275 discussed above.

But that does not mean gold will immediately reverse to the upside if it gets down that low. The definition of support is a price level at which the market stops falling, at least temporarily. Demand and supply return to balance, which only suggests prices should stabilize.

Indeed, seasonal factors suggest gold and other precious metals will remain soft through mid-July, according to John Person, President of Nationalfutures.com and co-author of the Commodity Traders Almanac.

Many investors also believe that a stronger economy and stronger U.S. dollar are hurting the metal. Since gold is priced in dollars, these two markets tend to move in opposite directions.


One long-time expert on the gold business disagrees, however. "For all the talk of the recently strong dollaradmittedly in its fourth upturn attempt since its low of 2008why has it been unable to push below the $1.20 level vs. the euro as the world debates whether the euro will even survive?" asked Ian McAvity, editor of the Deliberations on World Markets newsletter.

In other words, McAvity doesn't see the dollar as strong versus the euro over the longer-term, so other factors must be weighing on the price of gold.

This brings us to several factors that suggest gold is already in the final stages of the bear market that the media, and admittedly me, have only recently acknowledged. In a recent Wall Street's Best Minds article on Barrons.com, Tocqueville's chief gold-fund manager, John Hathaway, made the case that gold was nearing a bottom. 

Sentiment is as bearish as it has been in years, according to the Daily Sentiment Index survey of traders compiled by veteran trader Jake Bernstein at trade-futures.com. Now in the low-single digits on a scale from zero to 100, it tells us that just about all traders surveyed believe gold is still heading lower. From a contrarian point of view, that is bullish—there's no one left to sellalthough Bernstein is quick to point out that sentiment information provides a background, not a trading trigger.

Another sentiment read comes from the Commitments of Traders (COT) report compiled by the Commodity Futures trading Commission (CFTC). Commercial hedgers, which include mining companies and typically the group that usually "gets it right," are traditionally net-short in the futures market. But John Kosar, Director of Research for Asbury Research near Chicago, said that this group is at a historic "least bearish" position. In other words, even as they hedge their future production, they are expressing a belief in higher prices down the road.

India is the world's largest consumer of gold, and one of the more obscure sentiment reads comes from Sushil Kedia, Director of Quantitative Strategy for CIMB Securities in Mumbai. He said nontraditional Indian investorshousewives—are now making many calls to buy gold. In contrast, when gold prices were at their peak they lined up to sell. This is just an observation, not a quantifiable index such as the COT, but in Kedia's years of experience observing demand in the largest gold-consuming nation, this group of investors usually gets it right.

While the trend is indeed still to the downside for gold, the selling we've seen over the past few days does smack of urgency. From traditional technicals such as accelerated bear-market selling on huge volume, to extreme bearishness in sentiment, it does look as if gold is already in the ninth inning of its bear market.

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