While gold has moved higher in a stair-step fashion since October of last year, it has failed to generate strong momentum readings as well as threaten the high reached in May of 2006. This isn't bearish in my opinion but more a sign that the coming bull phase is still in its infancy. Will gold finally bust out, now that is inches away from $700? Let's take a look at a daily chart:

First let me say that gold is no longer in a consolidation phase. The metal has retraced more than 62% of its losses (from $730 to $540), which means that the correction has given way to a new bull phase. That mark happens to be at about $660. If gold had not broken $660, then we could worry about if and when the new bull phase would begin. Gold has exceeded $660 and thus we can assume the bull phase has begun.

Currently, gold has formed an ascending wedge with its three highest peaks following May 2006. Gold has to break above the slightly uptrending line to generate some much needed momentum. There is substantial support with the trendline and 100 day moving average at $655-$660. The first arrow shows immediate support (downtrendling line) at about $680. The best-case scenario would see gold hold this support while treading water between $685-$695 before making a run through $730.

Nothing in the short term has changed our outlook for the rest of 2007.

With gold looking neutral here in the very short term, traders and investors looking to put money to work should wait for either a pullback to support (at $680 or $660) or a clean breakout above $700.

Next lets take a look at the non precious metals.

Many analysts, (including myself) have been cautious if not bearish on this group, citing a US-led global slowdown and/or recession that could decrease demand. Towards the end of 2006, I held this view but have since learned, realized and reported on the strength of global growth and the lack of any material impact a US slowdown is having on commodity demand. So how much higher can the metals go?

First, let me say that I am fairly confident in this wave count and specifically the construction of this wave III that started at the end of 2001. There are certain characteristics that typify each wave and if you can spot such characteristics then the roadmap of the bull market becomes much clearer. In previous writings I have mentioned how in 3rd waves, the market at hand tends to accelerate out of the current trend channel and establish a sharper (more vertical) bull trend. Here we can see that clearly occurred at the end of 2005 and the start of 2006. Also, the old trendline, that GYX exceeded, successfully provided support. Next, triangle corrective patterns are almost always fourth waves. The consolidation/correction that ended earlier this year appears to be a triangle and a fourth wave.

Essentially, what we are looking for in the next 18 months is a final upward thrust, which would be followed by a potentially nasty bull market correction. The goal is to avoid that correction.

This wave count could very well be in synch with the fundamentals. The fundamentals tend to peak at the end of Wave III or at the outset of Wave V. The final wave (V) in a bull market is driven far more by trend recognition and investor psychology than by fundamentals. Everyone realizes the trend and thus moves into the market because "it's going up." Now back to the present.

Presently, the base metals are rolling because global economic growth is as good as it has ever been and also because there is rampant global inflation (money/credit creation) and all commodities benefit as an inflation hedge. As we move into the final phase of this bull market, more supply will be coming online (current high prices have generated increased investment in exploration and production) and economic growth will be worse due to the lagging effects of the inflation that is occurring today. It will still be a raging bull market but the point here is that there is a time when fundamentals peak and it occurs well before the end of the bull market. That time for base metals could be now.

In summation, the base metals should continue to "rock and roll" for another 9 to 18 months. However, understand that we are nearing the later stages of the move that started in late 2001 and that while a lot of money is still to be made, precautions need to be taken to avoid getting too bullish at precisely the wrong point.

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24 April 2007

Jordan Roy-Byrne
Trendsman Newsletter
www.trendsman.com
trendsman@trendsman.com

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