GOLD ENTERS ITS FIFTH CORRECTION SINCE 2006 -- GLD NEARS MAJOR SUPPORT ZONE WITH FREEFALL -- SILVER FOLLOWS GOLD WITH BREAK BELOW MAY-JUNE LOWS -- DOLLAR EXTENDS AFTER DOUBLE BOTTOM BREAKOUT -- OIL LEADS THE STOCK MARKET LOWER
GOLD IS IN ITS FIFTH CORRECTION SINCE 2006... Link for todays video. Despite a sharp decline the last two weeks, the Gold SPDR (GLD) remains in a long-term uptrend. Chart 1 shows daily closing prices for Spot Gold ($GOLD) over the last six years. The Zigzag indicator is overlaid and set at 10%. This indicator filters out moves less than 10%. There have been five corrections of at least 10%. With Fridays close, gold is down around 12.5% from its 2011 closing high. This is the fifth such correction since 2006. The 2006 and 2008 corrections extended after the initial 10+ percent correction. The 2009 and 2010 corrections were relatively short-lived as gold continued higher after a quick drop (two months). Even though the current correction may seem extraordinary, the chart below confirms that 10+ percent corrections in gold are not uncommon.
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Chart 1
GLD NEARS MAJOR SUPPORT ZONE WITH FREEFALL... Chart 2 shows the Gold SPDR (GLD) still within a multi-year rising channel. The upper trendline was touched twice and the ETF then exceeded this trendline with the surge above 180. I pointed out this pattern and the TRIX oscillator in the September 9th Market Message. The TRIX was above its signal line at the time, but moved below the very next week and the ETF fell sharply the week after that (last week). Now what? GLD is approaching a significant support zone in the low 150s. I say significant because three technical features confirm this zone. First, broken resistance from the triangle breakout turns support (yellow area). Second, the trendline extending up from January 2009 extends to the 150 area. Third, a 50-61.80% retracement of the 2011 advance would extend to the 150-157 area.
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Chart 2
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Chart 3
Chart 3 shows daily candlesticks and GLD in a freefall. The ETF broke support from the early September low and CCI moved into negative territory to start this correction. At this point, there are no signs of firmness and momentum remains decidedly bearish. Even though support is close at hand on the weekly chart, it will likely take a few days or even weeks for volatility to settle and some sort of setup or support reinforcement to emerge.
SILVER FOLLOWS GOLD WITH BREAK BELOW MAY-JUNE LOWS... The Silver Trust (SLV) followed both precious metals and industrial metals lower. Silver is some of both. Chart 4 shows weekly prices with SLV breaking below its May-June lows last week. The decline was exceptionally strong, but support may be close at hand. The yellow area marks a consolidation period from late 2009 to early 2010. Support in this area is confirmed by the October 2009 trendline and two 61.80% retracements. When there are two potential starting points for the Fibonacci Retracements Tool, I often measure from both points and look for a cluster. Both Fibonacci retracements confirm support in the 27.5-29 area.
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Chart 4
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Chart 5
Despite potential support on the weekly chart, the Silver Trust remains in the falling knife category right now. Chart 5 shows daily candlesticks the last six months. This chart was featured in the September 12th Market Message as the ETF broke triangle support. The subsequent decline was swift and there are no signs of firmness in the price action. In fact, this sharp decline compares to the May plunge when SLV fell some 30%. It took around two months to stabilize after this decline and resume the long-term uptrend. Such a cooling off period is often needed after such sharp moves.
DOLLAR EXTENDS AFTER DOUBLE BOTTOM BREAKOUT... The Dollar may be the wild card for gold, silver and other commodities. John Murphy and I noted that industrial commodities were under pressure from weakness in stocks around the world. Precious metals were holding up until the Dollar surged in September. The combination of stock market weakness and a surging Dollar is not positive for commodities. Chart 6 shows the US Dollar Fund (UUP) forming a double bottom from April to August and breaking resistance with a surge in September. The pattern measures around 1 point (20.85 to 21.85) and this targets a move to the 22.85 area (green dotted line). There is also resistance just ahead in the 23.25-23.50 area. An RSI breakout confirmed the double bottom breakout. Notice how RSI broke above 55 and to its highest level since June 2010. This shows a clear shift in momentum from bearish to bullish.
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Chart 6
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Chart 7
Chart 7 shows daily candlesticks over the last six months. Broken resistance in the 21.80 area turns into the first support zone. There are sometimes throwbacks after a breakout. This would entail a pullback to broken resistance and then a resumption higher. Sometimes prices just continue higher after a breakout. The bullish outlook for the Dollar could extend the corrections in gold and silver.
OIL LEADS THE STOCK MARKET LOWER... Chart 8 shows Spot Light Crude ($WTIC) falling over the last five months. Oil peaked around 115 and declined with successive lower lows. Adding a couple of trendlines shows a clear falling price channel. Most recently, $WTIC met resistance around 90 to confirm resistance from the upper trendline. The lower trendline extends to the mid 70s over the next few weeks. Below this trendline, the next major support zone resides in the upper 60s.
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Chart 8
The indicator window shows oil along with the S&P 500. Notice how oil led the stock market on the last two stock market turns. Oil bottomed several weeks before the S&P 500 in spring 2010 and peaked a few months before the S&P 500 in spring 2011. SPX tested its spring higher with the July surge, but oil fell well short of this high and showed relative weakness. This suggests that a bottom in oil, and perhaps peak in the Dollar, will foreshadow a significant bottom in stocks. We have yet to see either. Chart 9 shows the US Oil Fund (USO) breaking wedge support last week.
