Thomas
DeChastelain
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Bullion Charts and Commentary
posted Nov 13, 2004 at 01:26PM

Introduction

An excellent week for the gold sector. All of the bullish events one expected came to pass. Individual stocks with bullish pennants started breaking up early in the week. Bullion price remained strong and closed the week above key resistance. Although it took a bit of coaxing, the HUI did climb above the 240 swing-line.

Before discussing plans for next week, let's review the key charts to see where things stand

Gold Daily



430 becomes key short-term support.

Gold Long-Term



I am surprised that I am not seeing this chart more frequently. To me it is the most important chart going. It shows gold at the cusp of breaking a multi-decade trading channel. For EWA counts predicting a deflationary future for gold, this is the final redoubt.

Gold reaches this juncture in reasonably good condition to force a breakout. Of course sentiment is good, but when you look at the stocks there is no evidence of the pure euphoria of past peaks. The political and economic back-drop could not be more suitable.

HUI Daily



The biggest source of angst during the week was continually watching the HUI struggle with the psychological 240 barrier. A good day Friday saw the HUI move over this resistance. It would be even more comforting to see some follow through early in the week to get it above the mid-Feb peak high.

The previouly established trading range between 220 and 240 I interpret as a trading channel, not a triangle; as such the break to the upside gives a measured move target of 260

HUI/Gold Ratio



Breaking this triangle to the upside would have stocks leading bullion again, a confirmation of bullish strength.

HUI Long-Term




There is much of the current situation that reminds me of the situation in July 03. The previous 14 months were a pure swing trading environment...which suited me fine as I like trading stochastics cycles.

By summer 03 the HUI was heading back into massive resistance. The COT was at all time historic high and the dollar looked to be putting in a double bottom. Indeed the HUI has a few very bad days dropping sharply. At the time I was in cash so all seem fine. The HUI then suddenly reversed and put in the move to enforce the triple top break-out.


It is a hard trade for contrarians but the moral of the story is that triple top breakouts are significant technical events. The COT of course also went on to reach new all time highs. Again the moral here is that in this kind of environment let price be your final indicator..not technical condition.

USD Daily



The big key here is the triangle break-down which gives a measured move target in the low 80's

USD Long Term



The longer term chart also gives support to the thesis that the USD will move to the 80 level.

There is strong technical support there and lots of people are thinking this would mark a firm bottom.

Maybe. But the environment today is totally different today than the one that existed in the early 90's. There you had a goverment whose prime strategic economic plank was to reduce goverment deficits and who worked to stabilize, if not reduce geo-political strains. We have the direct opposite occuring now. Remember, four more years.

Bonds



Again, over the past three years, no meaningful countertrend rally in the dollar has occured without falling bond prices. The chart above is taking on bearish overtone...a potential fly in the ointment for the gold bull. It is not an intuitive relationship and only something that has developed in recent history. If bonds start falling and yields start rising and the dollar keeps sinking then you know the green-back is serious doo doo.

Discussion/Trading Strategies

There is of course a big difference between analysis and one's trading plan. Analysis is trying to anticipate what you think is going to happen in the future. A trading plan must incorporate the possbility that the analysis is wrong. Remember the COT is at historic highs; sentiment towards the dollars is in the pits. Bullion is at multi-decade resistance. There are powerful interests who will stick thier fingers in the pie. One can assume nothing


Looking at the above charts though, my thinking is that this is all going to continue resolving in a bullish manner for gold. You have a measured move target for the USD at 80.27. The HUI has a channel break out with a target of 260. If the HUI/gold ratio resolves its triangle to the upside then even that target should be exceeded.

If all that happens, I think it is safe to assume that gold will get past the 440 level, confirming not only a triple break-out, but a break of a decades old bear channel.

What happens after that is open to conjecture. My best guess right now is when and if the dollar hits the low 80's some kind of bounce will occur. During that period we might see some channel back-testing for bullion.

There is no garantee that this back-testing will occur...things could very well start getting out of control even before the State of the Union.

Trading thoughts. Not too much difference from last week. This is NOT an contrarian environment. You want to buy strength..pennant break outs, triangle break-outs things like that. IVN.TO and BGO. TO were classic examples of the genre






Again I am a big believer in stops. On entry points my stops are very tight. If you are a buying a potential break-out the chart either does what you expect it to, or it doesn't, and if doesn't then I don't want to stick around to try to figure out why..obviously the market is seeing something I am not.

I do use trailing stops as the chart moves up..but there ARE pros and cons here. It has kept me out of trouble and protected gains...but on innumerable occasions it shakes me out of a stock that goes on to much higher prices

But here I am comfortable with them. If the bullish scenario wins out we will have years of bullish trading. If this turns out to be a major top then one avoids the meat of the down draft.

The really nice thing about stops here, is that it is price that takes you out of the market ... not technical condition. If the bull case comes to be then things are going to stay overbought all across the board and prices will just keep going up.

If you can't find pennants or triangles then look for bounces off trend lines or obvious support. Tight stops and look for MACD crosses to confirm. (I say that because as I review potential candidates I am not finding too many pennants or triangles, a nickle explorer, a copper junior but no golds)

Make sure your postion is matched with the liquidity of the stock in question.

Hopefully next week will start with some follow through from the HUI. Bullion closing the week over 440 would be fantastic.

Good Trading

Counter-Point - Reccommended Reading

A good article by Marc Faber MARKET COMMENTS

and by Sol Palha GOLD PALLADIUM AND THE DOLLAR

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