Now that a couple of weeks have gone by and I've had a chance to re-assess gold's position in relation to its parabolic bowl, I see gold's recent rally of the $320 floor as an immediate-term positive, but gold is not completely out of the woods yet. Notice where gold bottomed relative to the bowl – slightly to the right of the mid-point, or vertex. Ordinarily, whenever prices bottom to the right of the vertex it means the bowl will soon be broken to the downside. But I have a hard time pronouncing this doom on gold since the bottom was so close to being at the mid-point of the bowl. In other words, I am inclined to give gold the benefit of the doubt and hope it has seen bottom above $320. Fortunately, we will all know sometime this week whether or not this is the case since gold is basically left with only two immediate choices: 1.) Break above the overhead 10-week downtrend line and begin a rally, or 2.) Break below the bottom of the bowl at $320.
Notice the steep downtrend line in the above gold chart which shows that prices have touched this line exactly three times. Whenever a trendline is tested at least three times it confirms the trend (in this case down) and when this line is finally broken it is a strong indication that the supply-related pressure has been relieved and a rally will commence. I say this only because it is very easy to draw false trendline in the gold (or any other) chart. In gold's present case the trendline is very easily drawn and is most definitely a legitimate "3-point trendline."
Fortunately for gold, its 40-week cycle has bottomed, so the time element is no longer against the gold market. Moreover, the parabolic dome that peaked in early February and from then until the first week of April had dominance over gold prices has been broken. Now all that remains is for the price element to confirm the bottom by penetrating above the pivotal $330 level. Now let's assume that gold has indeed found bottom above its recent low at $320. What then could be expected for the remaining part of the month? Finding solid support above $320 all this week would be a big positive for gold and would position the market for a strong technical rally in the remaining part of the month. Once $330 is penetrated, we would then expect the chart gap around the $345 area to be filled and the $350 pivotal resistance to be tested.
Common percentage retracement targets for gold in coming days include the $335 level, the area between $338-$340, and possibly $345. All that is required to turn gold's immediate trend bullish is for the downtrend line to be penetrated, followed by a confirmation move above $330. This could easily happen this week. The most important thing for gold is that it find support above $320 so its parabolic bowl can remain intact. Once the downtrend line has been broken the upward curve of the bowl can be expected to carry gold to its nearby retracement objectives.
Worst case scenario: What about potential downside targets if $320 is violated? As mentioned last time, "If the $320 area fails (i.e., the parabolic bowl) fails to contain the gold price slide...a trip down to $310 would likely be next and maybe even a test of the major $300 benchmark." So long as gold finds support above $300 its longer-term upside potential remains intact.
April 16, 2003
Clif Droke is the editor of the Gold Strategies Review newsletter, a monthly forecast and analysis of gold and silver futures and precious metals stocks. He is also the author of numerous books on finance and investing, including most recently "Junior Mining Stock Yearbook 2003-2004." Visit his web site for free samples of his analysis at www.clifdroke.com