The parallel price channel must also be determined by human interaction. What we are trying to do is the LEAST ARBITRARY thing for our analysis. Since the market determines the price bars we at least are using the markets symettry to define our trendlines. The upper channel line was drawn off of the first rally from the lowest point of the bear market. What better place to draw it from? The lower trendline is a parallel copy of that upper trend line which just so happens to fit perfectly with the lows of 2007 and the 2008 crash low. There is no better place to fit that parallel channel without pushing it into a price zone. The best evidence of the upper line validity is that the line drawn off of those two first bars of the bull market in 1999 just happen to touch the price high of 2008,2009, and 2010. Thus these lines provide us with the current maximum and minimum velocity or momentum of the bull market to date.
The other channel on this chart is the sideways dotted channel that defined the 2007 breakout and also the 2009 breakout. The 2007 breakout Dotted lower line channel provided the support for the 2008 crash low. The upper dotted line, a parallel to the lower line has thus far provided the breakout for the rally once the highs of 2008 were taken out. Should there be a large correction in the gold market, it should provide major support for the gold market. Notice how it is catching up with the lower long term line and only 100 dollars separate the two lines at this point in time. These two trendlines are the most important LOWER end support areas of the bull market. The lower dotted line is the worse case scenario - and is near a zone where some Elliot Wavers still project the market could move down to. While not entirely impossible, we rank it as a very low probability.
So what does the long term chart provide for us in potential? The upper trend line tells us that the maximum velocity or momentum of the long term bull market is at hand and has been for 8 months now. The 2008 uptrend line that price has been supporting on tells us that the market is progressing at a HIGHER velocity or momentum since the crash low and that these two converging lines with price in between them, is telling us that the market is about to decide which VELOCITY level is about to win out. It is probably the most likely point where the BREAKOUT that you've heard other analysts tell you is at hand for the past year should develop from - or should have a failure. We have maintained since April (and even as way back as last December) that the real breakout should only occurr if price can vault above these lines in the SAME FASHION ( a long range bar) as occurred when price broke above the dotted lines. In other words, with conviction. This is a key area---- and a pullback from here can't be ruled out.
We know that "breakout" imminent gets attention and subscriptions, but we opt to let PRICE tell us when the event is most likely happening. We think there are two types of investors out there. Those who subscribe to newsletters to hear what they want to hear, and those who want to hear what is most likely happening at the moment and what the odds favor so they might gain an edge in their investments.
Right now the market is telling us that it is on the VERGE of a major breakout. Should it fail and drop below the 2008 uptrend line, that breakout will be delayed. If we think about it - a REAL BREAKOUT can only happen IF the upper trend line is exceeded with CONVICTION. That is not suggestive that one should not hold gold unless the BREAKOUT is confirmed. It does say we should be cautious in ADDING to existing positions here unless we trust our own convictions and have plenty of staying power. But this is a long term view only. Let's look at a medium term view (below). In this case, we will use the gold ETF (GLD) as it is a very popular way of owning gold. (The best way is to own physical gold, especially if you're a long term investor. This way, you'll be holding it in your OWN hands (it won't be lent out) and your much more likely to hold on to it for the long run. If you are not a long term investor - GLD is a good vehicle - for trading. But don't expect it to hold out should a real CRUNCH in supply develop.
Courtesy of: www.freestockcharts.com
The above chart is a WEEKLY chart view of gold via the ETF. It is much busier than the monthly because it is more a medium term view than it is a long term view and is therefore more prone to change.
Many players think that a penetration of channel or trend lines is an immediate sign to either a breakout or a breakdown in trend. Our view over the years is that trend lines are made to be BROKEN. What is important is what price does ONCE the line is broken. Most analysts ADJUST their trend lines to curve fit but we try and maintain some semblance of original lines so as to understand price dynamics at the lines themselves and not be faked out on a penetration. In this view we have the main CHANNEL - the 5 year support line and the 5 year resistance. As market dynamics unfold, we have added (in order of importance) a GREEN MOMENTUM channel which the lower line provides the CURRENT momentum since the 2008 crash low and an upper parallel green line if we get a breakout above the 5 year resistance to project where maximum velocity on the upper end should occur. Since the 2008, 2009 and 2010 peaks were above the 5 year resistance line, we added an upper white line to gauge the new peaks. That line has provided the last three peak bursts of momentum. The interesting dynamic in this chart shows that GOLD is attempting to INCREASE the velocity at which it is rising and FORM A NEW CHANNEL to represent that new momentum. The STEEPER the line however, the more likely it is to fail.
The other thing that is good (well-perspective is everything) is when we look at the LOWER trend lines. For instance, the lower 5 year support line has been touched on every occaision after the UPPER line resistance was hit with the EXCEPTION of the 2009 high. The perspective it brings is that it IS POSSIBLE for gold to reach that lower line and yet still maintain the momentum of the long term bull market. In other words-it's the ULTIMATE place to buy. For the past 22 months - the best place to buy is the LOWER GREEN uptrend line from 2008. The JULY low penetrated that line during the week of July 27th but ended the week closing right on it. Thus the best buy opportunity of the year so far is each time price hits that lower green line. The moving averages have risen along with this lower trend line and the low of July 27th was right at the moving averages. For the most part, the best time to buy is at the lower trend lines and on occaision when a breakout occurs.
So where does that leave gold for the future?
There is a fixation we have as humans to know the future and it has been this way since the dawn of mankind. The reason most analysts make projections is simply because the AUDIENCE demands it !!!! It is usually the most difficult of tasks. Sometimes the market lets you project correctly and other times one can be way off. There is no one who knows the Future. One can only LOOK at the past and try and deduce the MOST likely events to unfold. For instance - in our original update of April, we picked the price highs we did because the long term trend line had CURTAILED ALL price probes above that line. It was no esoterical or mystical chrystal ball method. For a price low, we picked July/August becaue that is where price usually bottoms during the year. Nothing else. We stated that as long as we held 1135 that the uptrend would remain intact. That was because our SUPPORT lines indicated that it was the most likely event. Sometimes the simplest and repeating things are what work best.
One of the things I have learned over the years is that the real money is made FOLLOWING the market. This is not to say we should not have price projections or know when to enter or exit the market. On the contrary, ENTRY and EXIT is the bottom line. It is the only thing that counts in the end. Where we get confused is whether we are in for the long, medium or short term. Without that definition, we tend to PANIC, jump the gun, and often hold on too long - or get out too soon. So it is paramount to understand and define your time horizion on your purchases.
The one thing that is nice about channels is that they are just as relevant on an hourly basis as they are on a monthly basis. The channel line below is the one we have been using on our short term trend. It was drawn off the last corrective phase of July and a parallel channel line was copied to provide the lower trend line. Throughout the August move we have been able to maintain a bullish stance for two reasons. The first of course is the channel itself and the second is that the price pattern is not choppy and overlapping. To get an understanding of what we mean take a look at the uptrend attempts in July. See how the uptrends were choppy and overlapping? Note how the look of the pattern is drastically different since the low. This is the other way to determine the main trend. It is usually not CHOPPY or overlapping. Did we get in at the bottom? NO. We got in at 1186. We got in once price provided the odds that a new trend had developed. Will we get out at the top? Probably not. Once the trend gets choppy and overlapping, or once the trendline is broken with conviction (in this case 1225, we will exit). The last two highs this week is starting to get choppy and overlapping. Should we get a rally that fails the last two highs, and then starts to trend down we'll look to take short term profits. (Not long or medium term).
The same then can be said about the medium term trend. Should prices fail to move above the upper trend lines, we will look to lighten up. The same medium term stops we discussed in the April issue---circa the 1135 area is our medium term stop.
Does anyone really know when the top will occur? NO. If they did, you'd already be rich by following them. Do I really know the top? No. Thus the best thing we can try to do is FOLLOW price. When we think about it, FOLLOWING PRICE is much more powerful than trying to pick a top or a bottom. Ask yourself, are you making money picking tops and bottoms? Yes, the market lets you pick a few, just enough to keep you hooked on it. I'm talking about the longer term.
The current bull market is either going to continue HIGHER and set a new momentum channel (the green channel line we discussed in the GLD chart, or it is going to correct back down to one of the lower trend lines. It is as simple as that. It is one of the two. It is either going to stay in the current velocity that it has for the past 10 years, or the "breakout" boys are finally going to have their day. SHOULD GOLD EXCEED the upper trend lines - and do it with conviction, then a breakout to higher ground will develop and a new momentum line in gold will occur. Should gold fail at these upper trend lines or slightly beyond them, then a correction in the Nov/December timeframe should take place. The majority of highs in this bull market have occurred in December. And that is the final point of this missive. Our best guide to the future is to look at what has happened in the past. These are not my words, but the words of W.D. Gann - one of the greatest traders of our time.
What would gold look like if it does breakout?
The current momentum from the last two major lows suggest this channel line below. If the breakout boys are right, then the upside has plenty of room. Since the last major correction was $330 dollars, and the rally from the 2008 low to the dotted line was $320 dollars, and the rally from that first correction (850-1225) was $375 and the rally from the last low started at 1040, we should assume the next peak to be in the 1350-1425 area. I have seen other trendlines that point to the 1650 area.
Finally, should gold break below the lower trend line the potential to pullback to the upper dotted line at circa the 1135 area has potential. The other option is the lower dotted line below 1000. At this point in the pattern, we think it would be unlikely for gold to hang around the 1250 area this long if this were a peak. Thus the odds favor that gold makes a higher price point in the coming months, but price is the ultimate determinate. THE JULY - AUGUST lows are the key. Price must remain above that area in order to keep the medium term bullish. As long as we are above the 1135 area, we favor the upside in gold in the medium term, and as long as we hold the 2008 uptrend line we favor higher prices in the shorter time frames. The current point in gold is once again at the major breakout point - a point that if the upper trend lines are finally breached with conviction, then another upleg will be underway.
From our point of view, we will continue to FOLLOW price as much as possible and will take each leg (up or down) as it comes. We also follow silver and the key gold stock indexes.
But until price stops going higher, we will respect this rally. If we falter near here we will respect historical precedence and look for a pullback into late autumn by calling an end to this rally.
We are now at a critical juncture in gold's bull market. At www.goldtrends.net we monitor the price pattern on an hourly, daily, weekly and monthly chart basis. And we offer extensive commentary on what it all means, along with support and resistance levels in advance of each day's trade. We also follow silver and the key gold stock indexes.
If you would like to join us for the month of September and follow along with a free pass, send us an email at firstname.lastname@example.org we'd like for you to join us. May you all prosper in the coming year.
Bill Downey is an independent investor/ trader involved with the study of the Gold and Silver markets since the mid 1980s. He writes articles for public distribution for other websites and well as his own website at www.goldtrends.net. He has written articles for Futures magazine as well. Copyright © 2010 Bill Downey
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