40-Week Cycle In Gold Is Bottoming
Cliff Droke
The dominant interim cycle in gold futures, the 40-week cycle, is still bottoming and is scheduled to end later this month. This is what is primarily responsible for the steep decline in gold prices in the past six weeks. But the good news is that entering April gold will be have started the ascending phase of a new 40-week cycle, which should help lift prices to the higher levels seen earlier this year.

Some gold traders have sweaty palms about the ongoing market correction and fear that gold may have seen another long-term peak. I do not share this view since the peak last month occurred at precisely the mid-point of a parabolic dome in the daily chart (see below), which is normal for a market in the midst of a healthy overall upward trend. Also, the steep nature of the recent decline is more typical of bull market corrections than of beginning bear markets.

The parabolic bowl drawn in the April gold daily chart in our previous gold futures commentary was smashed by the drop in gold's price on Friday (Mar. 14), which led some readers to ask, "Is this bad news for the gold market?" Our answer is an emphatic "No!" True, this bowl pattern was broken, but it was purely an experimental bowl and I deviated from the time-tested rule of starting a parabolic bowl structure with a recent price peak in drawing the bowl where I did last week in the gold chart. Simply put, it was a poorly-constructed bowl so it was really no surprise that it was "broken" so easily. Secondly, after I went back to the latest gold daily chart to draw a new parabolic bowl the way it's supposed to be done, I found that the *true* bowl hasn't been violated at all. Take a look at the chart below to see for yourself.

This gold daily chart shows that the vertex, or mid-point, of the parabolic bowl has yet to be reached but will be by the end of the current week (March 17-21). It also allows for a further drop down to around $325 if gold is unable to find support above $330. The 7-month uptrend line stretching back to last August also intersects the $325 area and coincides with the bottom of the bowl, making this an important pivotal point worth watching in coming days.

Another sign that we are near the end of a downward cycle rather than in a protracted bear market phase is the nature of the gold stock-related news that has been reported in the past few days. The news has been very bad for the most part, yet with little discernable effect upon the gold stock market, which is a sign of underlying strength. Keep in mind that the gold stocks are typically a leading indicator for the yellow metal, and it's very prescient to note the fearful tone of some high-profile pieces of gold stock-related news lately. This kind of "bad" news is especially prevalent around an important bottoming point, especially as the market has already long-since discounted the "news."


March 18, 2003

Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com