Gold: A Critical Crossroad This Week (Part 1)

Part 2 of this article is HERE.

This is a three-part article that will cover: what is capitulation, gold price correction targets, and where the miners and the US dollar stand.

The precious metals markets are at yet another inflection point and as usual there are several different directions they could take. As a trader, it’s imperative to keep an open mind and not to get attached to a particular conclusion or path but rather listen to what the market is saying. At Chartseek, we crunch the data, looking at previous variations and consider all differing time frames in order to produce possible outcomes. Once we have narrowed down the most likely scenarios, we watch to see which one appears to be playing out. We see our current circumstance having us at a critical crossroad. Two scenarios have price bottoming likely next week, the third scenario has gold price breaking support and beginning a capitulation phase. All situations likely hinge on how the market perceives the news and data released by the Fed on March 18th.

What is Capitulation

As humans, we are emotional, greedy, fearful and proud. It’s just the way we are, and it’s because of those reasons we see extremes in markets and volatile fluctuations. A correction is just that, it balances investor sentiment and creates an equilibrium in price. Due to our human tendencies corrections can sometimes end with a violent capitulation. As gold price falls, stop orders are triggered, trading firms can engineer such moves to create a selling climax. The selling begets more selling, and panic ensues, the last remaining holdouts throw up their hands in despair selling for fear of losing everything.

With the extremes and passion often seen in gold, it increases the likelihood that this 3+ Year correction may end with capitulation. The next significant support is the $1000 level, I imagine many investors will see that as their proverbial “line in the sand”. A selling panic will most likely attack that level, buying will come in and a rally will follow. After a sharp rally or a consolidation, prices may make another attempt on the $1,000 level. If stops are triggered and a full on selling panic arises, price could shave off $100-$200 in just a few days. In both capitulation versions (below), our max low is around the $850 level for gold but a spike to $800 is not out of the question. Once the panic ends the correction will be over, and we will begin the final leg of this great Gold Bull market.

Gold Capitulation 1

This version has gold price slicing through the $1,130 low (most likely following the March 18th Fed meeting) like a hot knife through butter. It will be drawn to the $1,000 very quickly, buyers will come in and shorts will cover at that level. After a rally, the low made fails, and a selling panic breaches $1,000 price continuing $100-$200 lower.

Gold Capitulation 2

This scenario has the same downside targets, but a drawn out consolidation takes us into the second half of 2015.

Gold Daily Chart

Gold is on day 13 of its common cycle (average 25), and Wednesday (Fed Day) will be day 16 of this common cycle, which puts us in an awkward situation. Sixteen days is theoretically enough to complete a cycle (especially since the last Cycle extended 10-days beyond average) but the average common cycle timing suggests a bottom closer to the end of March. That opens up to the possibility of a Fed News Event that crashes price lower through the $1,130 level. Lastly, this chart (below) shows the possibility of a sharp snapback/short covering rally that will likely fade and push the Biannual Cycle Low (BCL) into the normal timing window of late April to early May.

Basic Plus and Premium subscriber will be updated during the week to events as they unfold, those paid subscribers to the Example Portfolios will receive trade alerts and entries as they happen.

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