Gold has now reached a timeframe where a December pullback is in effect. If things play out a temporary bottom should be seen in mid December or early January and another gold leg up would develop into the early winter……. the 1075-1125 area ….offers a potential opportunity.

The chart below shows just how important the 1075 area turned out to be.  Look at the price of last two lows on the chart.

Since that December 11^th update gold bottomed right at the 1075 area. In early January (the first trading day) the price of gold opened under 1100 and another rally leg of 93 dollars from bottom to top price developed into mid January.  But since that time gold and just about all other markets have a begun a severe short term decline.  The one market of course that is rallying is the US Dollar.  When you look at a seasonal chart of the dollar BEFORE the turn of the century it looked like this below.  We can see the lows are made in the October thru December time frame and the highs occur in February, March or June depending on the strength of the rally.  Since the dollar has been so one sided this past decade, (especially the last few years) the rallies we’ve seen (or haven’t seen) usually fizzle out early.   Thus the potential peak or pullbacks should be in February, March or June/July if the dollar does in fact have a medium term rally.    Therefore, if the dollars trend remains bearish on the longer term , we still should expect a dollar peak in a few weeks, (February) a few months, (April) or by the beginning of summer.   DEPENDING on its strength or lack of will determine which peak point the dollar reverts back to down.  If the dollar has any seasonality, the next big move down (in a strong trend) won’t be until summer.

This also suggests that gold’s next BIG MOVE might not be until summer arrives.  That doesn’t mean that gold can’t move higher, but it does mean that the strongest time for gold will probably be the second half of the year and not the first half.  However the dollar has a pretty good pullback seasonally at the end of March as well.  If gold is indeed still strong and the underlying fundamentals that got us here are still in effect then the potential for gold to make a solid bottom could be in that March timeframe as well.

Another commodity that usually comes alive in the March timeframe is the oil market.  And it plays well with the increased activity for vehicle travel, vacation time and peak increased springtime business.

In that same update from December 11^th we made the following observations and speculated on the price of crude saying:

Odds suggest that a rally attempt should develop from this 65-70 dollar area. SHOULD OIL MOVE BELOW the 200 day average at$ 65, then the potential for a move below 60 towards the red support line will be a potential area for a late winter bottom. Look for December or March to provide the lows in crude.

As you can see from the chart below the oil rally did indeed develop from the 65-70 area (69.81 was the low).   Since then we got the rally we projected and now oil is on its way towards a late winter low.  Whether the downtrend will continue to late winter and below 60 is yet to be seen.  However, this is a great time to update the outlook we had then.

If we zoom out on the chart below just a bit we can see the 100 day (blue line) and the 200 day (red line) moving averages are getting to be very close together.  And as technical analysis would have it, price is right in between both moving averages.   To illustrate how actually stable crude oil has been we can see that today’s price is at the same area as the June high and the summer prices (July/August/September)

So in the crude oil market there’s a short term decision point coming here in February and that is whether we hold the 200 day moving average at 71.50 and/or test the September/December lows in the 65-69 area and bottom out in February.   But there is one more level of support and that is the 60 dollar area we mentioned in our December report.  If we look now at this 60 dollar area we can see that our long term moving average (green) is sitting right at the same place our lower channel line resides.   If we take the July lows at 58 and our lower channel we would speculate that the 56-62 area in crude oil would be a potential low point we could expect if the crude oil market does indeed bottom out in its seasonal March timeframe.

In summary, the crude oil market should bottom at one of the two areas listed above and the ideal time would be in the next 4-8 weeks.

Let’s look one more time in the precious metals camp and the charts below.

Gold is currently sitting at the 100 day moving average.  We’ve already seen on our zoom in gold chart earlier in this report that the 1075 area is an important price.  Should gold bottom here we would suspect a bounce or rally into mid February.  If the oil and dollar seasonal play out I suspect that a February rally would eventually give way to one more correction in line when the oil and dollar seasonal high/low’s come into play.  Now they won’t come in all on the same week, but we can expect within a few weeks.

Should this current support area give way, odds favor a move to the 200 day (red moving average) would be the next likely stop for gold.  Interestingly the 200 day average in gold is right where the lower channel line resides and you can’t see it on the chart below at 1021.

Finally we have one more area where our long term moving average is and that area is at the 966 price area.   If we combine the September low at 980, we could say that major medium term support would be the 966-980 area.  Although that sounds extreme maybe, its only 100 dollars from here and this pullback we just went thru from the high is 140 ago.   In any event these are the three areas we are looking at to provide an opportunity for a turning point and rally.  Therefore we favor a Feb/March low and a spring rally when we look at the overall picture.

And finally let’s take a look at Silver below.

Here too we can see that silver is trading in between the 100 and 200 day moving average as this week’s range touched both averages and price is sitting in between both averages.

Silver is also reaching an oversold area as its position is near the averages, the lower channel line and the Williams indicator at the bottom of the chart is also flashing oversold.  The signal comes when the indicator moves OUT of oversold and begins to head back up.

Finally we see our long term green moving average is at the 14.40 area.  Observe how this moving average caught the February 2008 high when price touched the average at the same time that it touched our upper channel line.  Then in August and September of 2009, price this time pulled back down and kissed that average from the upside and AGAIN the price touch was at the bottom of the price channel and the fall rally took off from there.  Should silver break down from the lower channel line and the 200 day moving average,  the potential will be for silver to drop to this key average in the 1440 area.

In summary, we think this current pullback has a good chance of bottoming at one of these price zones and will probably follow the seasonal aspects that gold takes.

The key of course is not guessing which price area these commodities will bottom at but to observe price action and look for setups where we stand the best chance of catching the trend once this correction ends in these commodities.  The medium and long term trend is still up in commodities.  However, we have recently seen shades of 2008 where all commodities go down while the US Dollar rises.  This is the one thing that traders and investors (and we also) must keep an eye out for.

We pay attention to the short term movements in the same manner we do these medium term trends.  When our short term signals line up with these medium term points, we isolate areas of low risk setups and take action.  We invite you to stop by our website, check it out, and maybe get on our e-mailing list.

We’re looking at potential setups developing in the metals and oil markets all the time.  This year promises to be a challenging time to be involved in these markets and the ability to turn a profit will be the result of getting a good low risk setup.  That’s something we work at all the time.

I will have a Gold Trading Service for trading gold futures, CFD’s and ETF’s

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John Winston
Commodity Futures and ETF Trader
www.TechnicalCommodityTrader.com

January 18, 2010

A lot of investment focus for outlook 2010 is geared toward inflation based assets such as gold and oil.  What a change from the turn of the last decade when the rage was totally based on paper assets such as stocks, bonds and yes folks, even the US Dollar.  Indeed the age of the Dot.Com stocks was the zenith of the paper world.

Right around the time the NASDAQ was peaking at the 5000 area, gold was bottoming at the 250 dollar area and crude oil at the around the 18 dollar per barrel price.  How times have changed.

Gold Trends Analysis

Today the question is not whether gold is a good investment but rather if the correction from December is complete and higher prices are forthcoming?

The chart above of the gold ETF (GLD) shows us the uptrend that the precious metal has been in.  It is only investment that has made a post crash 2008 high and it certainly has a lot going for it as we enter this year.  Inflation fears,  currency crisis, debt default, physical supply, and a fundamental loss of faith in government and the financial systems has brought gold followers and analysts from being shunned at social events to at least tolerated today.

A look at the chart shows that gold is in a long term uptrend and is very reflective of the fundamental developments that are transpiring worldwide.  But what about the short term outlook of gold?  Has the lows of December provided the next buy opportunity here or is there lower price still lurking in the upcoming month or two?  While we are long term bulls, there are a few things on the chart that has our short term attention.   Let’s look at a few of the issues.

First off, the arrows on the chart highlight something pretty important when it comes to a volume spike. And that is when they occur the potential for good sized corrections are at their most likely to take place.  The past few years and the arrows on the chart confirm that.  But more importantly is that when they occur at or near the top of the upper channel line in conjunction with MACD and Money Flow indicators turning down, price has always retreated to the bottom of the channel line before initiating a new sustainable bull market run.  Now while that may seem a long way from here, historical precedence argues that it is the most likely course.

The red moving average is the same as the 200 day moving average only it is measured in weeks.  Notice how often over the past three years that price has pulled back at or very close to that average.  The fact that it is now resting at the same area as the lower channel adds weight to the potential of a correction in gold to reach that area.  The fact is that markets do not go long periods of time without testing that all important average.  The chance that 2010 will not test the 200 day average is not very high.

How about the money flow indicator at the bottom of the chart?  Notice that there has not been ONE PRICE BOTTOM during the last three years that did not have the Money Flow Indicator touching the lower price line at the 20 area when gold’s bottom occurred.  This is yet another indicator that has me cautious of calling the all clear for gold over the short term.

How about our MACD indicator?  While this indicator has not been as concise at trend picking, we can see that the times MACD was in a downtrend, gold for the most part followed it down.  Currently this indicator is on the verge of turning down as well.

While I don’t use technical indicators as my buy and sell tactics, I do like to look at them as coincidental indicators when I am suspect of trend direction.  The fact that they are not in bullish mode adds to the concern whether gold has really made a significant bottom.   Finally, if we look at all of the major pullbacks in the past few years, we can see that pullbacks usually do not have one straight line down for 4 weeks and then a resumption of the trend.  In fact, the shortest ones lasted in the 8 week timeframe and others were much longer.

Since the beginning of the month and year, a nice two week rally has unfolded in Gold running gold up from 1075 to the 1160 area at its peak.  As we close out the week, we can see that gold and the 50 day moving average (the blue average line on the chart) are both at the same place in price.  For GLD that price is the 110.80 area.

So where does this leave us on the short term?

While we have re-iterated we are long term bullish on gold, our analysis of the conditions on the chart above leaves us in a NEUTRAL position as it relates to the short term.  Here’s what we are looking at.

Gold ETF Trader

From a short term basis, gold has reached a decision making area.  With the exception of November, which was a blow off month for gold, price usually begins a sideways pull back from mid month to end just in time for options expiration and such.   Therefore should gold fail to exceed last week’s high in the metal and the ETF, odds will favor that an end of month short term low could develop.  From a price perspective, GLD has a gap in price at the 107area and two short term support points (see blue arrows) at 105 and 100.  We would expect a pullback to one of those areas depending on the strength and/or weakness that gold exhibits over the next few weeks.

Also on the short term decision plate is how the 10 and 39 day averages are situation right where price and the 50 day average reside as well.  This merging of price with the 3 moving averages confirms our neutral stance over the short term.    From here we will look to see which way price breaks and will look for a low risk entry when time such an opportunity.

From a medium term perspective and a historic seasonal basis, gold should be closer to the end of this current rally leg than its beginning.  Price has more often than not been in its upper range come February over the history of gold.  With a 540 dollar rally over the past 14 months, it should stand to reason that the potential for a deeper correction than what we’ve seen is a possibility.   If one studies the chart, there is usually a mid-winter sell off in gold.  In strong years the rally can extend into the spring but it is not the norm.  The point is we should expect a correction at or near this time of year.  Rather than guess at its beginnings, we will look to see breaks of the support areas we listed above as increasing the odds of such an event.

With the 200 day average right near 100, a pullback in 2010 towards this area might provide a good set-up entry from a medium term perspective.  This has been a solid buying area the past few years with the exception of the 2008 crash.  It is a rare year that gold or any market for that matter does not visit this key average.  Medium term investors should have cash ready to put to work if such an occasion were to develop.   However, there are important considerations and technical work that needs to be done at the time of each test of key support area and one should not just purchase at that price blindly.

When we think about it, there are really only 4-5 good swing trades per year.  When price patterns, support areas, technical timing indicators and sentiment all line up, it is then that low risk entries are presented to us.   Even a short term trader will notice that the above chart of daily gold only required one or two trades per month for maximum efficiency and profit.

Investors on the other hand who are not worried about the weekly blips but are concerned with the yearly trends should be trimming down their positions this time of year and reducing their exposure, not increasing it in a normal year.  Unfortunately, things are anything but normal these days.  Regardless of that fact history shows that the best performance from the end of winter into the June timeframe is crude oil.

One look at the seasonal chart below shows that the best time of the year to own crude oil is to plan purchases in mid to late February when the seasonal tendencies of crude produces the best rallies usually.   Interestingly enough this is when gold usually takes a back seat to oil in the same timeframe.  If an inflation investor is your modus operandi for 2010, a portfolio rebalancing in February might be an interesting tactic to execute.  If inflation is a problem, oil will follow gold higher.  Indeed, history suggests it outperforms it in the spring.

Over the past week oil has once again closed lower on weakness.  The seasonal chart below shows us that is exactly what we should be expecting during this time of the year.

Seasonal Crude Oil Trend

The key now will be putting together a low risk entry in the same manner we described earlier in the article as it relates to gold.

Crude Oil Futures Trader

When we place the seasonal chart close to the oil chart we can see the inconsistencies with the seasonal at first glance.   However, the most important factor was the late February low was correct in forecasting a great entry price for crude.   The seasonal called for a pullback from April to June which did not occur in 2009.  However the seasonal shows that the second best time to buy crude is the July time frame on the seasonal.  Look how July provided the second best time to buy crude on its chart.

Now we are in a timeframe where crude should become its weakest and if history is with us, should provide a great opportunity mid winter.   Here’s where one wants to look at the extent of the coming pullback.  We know crude should be weak.  There are three key price areas that have produced lows since July.  These are the areas that should be watched for a potential winter low.

In summary barring another crash of epic deflationary proportions as a few advocates have surmised, the gold and oil market should continue to provide a bull market status.  Those heavy in gold might want to consider a trimming of some of the great gains, and shifting a bit into crude oil come mid winter.

At Commodity Trader our focus and emphasis is always on waiting patiently for low risk set-ups in the metals and the oil markets.  Come by and visit our site and check out what we’re specifically recommending.

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Regards
John Winston

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