Waiting for the BreakoutTwo days after the Labor Day holiday into the seasonally powerful month of September one would think that gold would already be on its way to new 52-week highs, right?
But alas the mighty metal still appears to be quite sleepy as of late. It is hugging the now well known down trend line on generally meager price moves. Like a perfectionist it seems to want to fill in every little unknown price space under this down trend line before it does the widely expected upside breakout.
This quiet trading certainly is doing a great job of putting people to sleep. The dramatic consistent upside we witnessed from December 2001 to June 2002 was quite a sight to behold. It was persistent, powerful and had us looking eagerly at the 330 ultimate resistance level. At that time there was a feeling that it would be broken quite soon, the bulls were running strong, it was their day in the sun, and message boards everywhere had a very characteristic 'buzz' and feeling of confidence.
Many of us are now still just as bullish but admittedly the slow trading and meager price moves have us wondering which day will mark the all important upside breakout on big volume. Perhaps it will be the key psychological date of September 11th? Or, maybe it will happen as soon as this week, the 6th of September. Regardless of WHEN it happens, all indications are now that it WILL happen.
Lets take a look at the weekly gold chart:
This is the weekly gold chart plotted against the weekly MACD indicator. It seems clear that we have a fairly large symmetrical triangle forming on a weekly basis. Also known as a 'coil' according to the well-known founders of technical analysis Edwards and Magee. By definition, when one breaks out of a coil it is typically a fast powerful persistent move. That is what is happening here on a weekly basis, we are building power for the next up cycle. A break out above the blue down trend line will lift the weekly MACD indicator into a crossover which to me is the green light going into the winter. This is where the 'easy money' will be made.
Keep in mind that this next move up will also be at a higher trend line slope meaning that the pullbacks when they come will be shorter and probably less dramatic than during 2001 and the first half of 2002. Those who sell to early into this next big move up are likely to end up regretting it. Remember, the trend is your friend and let your profits run.
But all this talk is perhaps premature. We need and want the upside breakout and we want it on huge volume. It is only a question of when.
I believe like most others that once this next rally really gets going it will likely start creating a whole new demand set for gold. Perhaps it will start to get some more mainstream headlines as people realize that the last few months of consolidation was not a case of gold going into its old depressing bear market ways.
That's the story on gold. Now lets take a look at the S&P 500:
Sure enough, they were unable to take it above the head and shoulders neckline 950 area. That level marks too great a resistance level to overcome for now. This is a classic rally back up the head and shoulders neckline in a rising wedge pattern.
Now we have broken downwards out of the wedge and are headed back to test the lows of 770. The real question at this point is what happens once we get down there. Do we break it, or do we consolidate for another attack at 950. For now that is a tough call. One might make the case that a super bearish September October time frame will be enough to help us crack through those lows to the downside. But we will have to wait until we get there before making any conclusions.
Overall though the trends are clear in both gold and the S&P500. One might want to call the trading action quite boring during the last few months since it has been for the most part sideways and indecisive. The good news though is that we now have a superb foundation for a break of the ultimate resistance 330 level.
Patience is indeed a virtue.
September 7, 2002
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