Russell Sees Gold At $556
Let's study the point & figure chart of gold below. All months are numbered on the chart. Thus, we see the steep January-February rise (long row of Xs) to the high of 388. Next came the correction down to the April low to the 324 box.
From there we see the May rise to the 372 box, followed by five swings back and forth. In August gold dropped to a final "shakeout" low of 348. This was followed during August and September by the most recent long rising line of Xs to yesterday's high at 388.
This gave us a "double top" at the 388 level. The question, would gold continue to rally to the 392 box -- or would a "back-off" consolidation phase be needed first, prior to an attack on the 392 box?
That's the question that could be answered today or in a week or even longer. I say that because the most recent advance shown on the chart is extended, but in powerful bull markets the price action can get extremely extended prior to any correction.
I'm writing this at 3:30 AM in the morning, and I note on Kitco that gold is up 4.90 to 392.60, which is impressive for a night move (usually, gold is knocked down a few dollars at night). If this move holds at the morning opening gold will have broken out to a new high for the move.
Often, following this kind of breakout the item will drop back into a consolidation pattern, but in particularly powerful bull markets the upward momentum will take the item well above the preceding peak first -- prior to any consolidation.
Flash -- this is written after the close today. Gold moved to a new high to the 392 box, then backed off by today's close to consolidate, since gold (as you can see on the chart) is extended.
The obvious next "psychological" level for gold is 400. Moving above 400 will get attention from the media and from the crowd. This is because the crowd tends to think in terms of even numbers -- 300, 400, 500.
I'm asked whether the 50% principle can be applied to the action of gold. I believe it can. And this is the way I am applying the 50% Principle to gold.
The previous bull market high for gold was set on January 21, 1980 at 861.
The bear market low for gold was set on July 7, 1999, at 252.
The 50% or halfway level of the long bear market comes in at 556.
Therefore, I see 556 as a very important upside target for gold. If gold can reach and then decisively better 556, I believe the gold bull market will begin to eye the 1980 high of 861. Of course, this is looking far ahead, very far ahead. Right now the "task" for the gold bull market is to close and hold above 400. If that can be accomplished the next upside target will be to advance above 500.
Because there is and will be so much opposition to higher gold prices, my thinking is that the gold bull market is fated to be a long, drawn out affair, but with its ultimate high much higher than even the bulls are now contemplating.
It's well to remember that bull markets in gold are different than bull markets in stocks. Primary bull markets in stocks end with massive speculation grounded in greed. But explosive bull market finales in gold are a product of fear. And we might remember that fear is a stronger emotion than greed. Thus, I foresee the final end of this gold bull market to be a spectacular affair and a reflection of fear by the crowd, fear that their savings in dollars are going "down the drain."
Now let's turn to the key barometer of the stock market, the D-J Industrial Average. The P&F chart below gives us a graphic picture of the price action of the Dow. Each box on this chart represents 50 Dow points and only advances or declines of 150 points or more are depicted. This is a 50 point 3 box reversal chart.
First note that all the action since March has taken place above the rising or bullish trendline. The Dow made steady upside progress to the September high of 9650. From there the Dow turned down, and we see the row of four red O's.
The question now is whether the decline will continue down to the 9350 box. If so we will have our first P&F indication that the trend is in the process of turning bearish. If the Dow declines to 9350, the next test will be whether the Dow will decline to the 9200 box.
On the upside, it will now take a Dow advance to the 9700 box to re-confirm the bull trend.
Since the primary trend of the market is bearish, I believe that the odds during this or any trading range favor an eventual breakout to the downside.
Flash -- since writing the above, the situation has changed -- see below.
CONCLUSION -- Is the whole corrective advance against the primary bear trend over? Obviously, I don't know and can't know, but let me put it this way -- it wouldn't surprise me.
Values are ridiculous, sentiment has been bullish for months, the Dow failed numerous times to hold above the 50% level, and from what I gather many people and most equity funds are heavily long. A bear market likes to head down when the greatest number of people are least prepared for trouble, and this could certainly be one of those times.
The economic fundamentals, in my opinion, are ominous, and the administration is unraveling. So nothing would surprise me here. Anyway, that's the way Richard Russell sees it.
I think the Dow will tell the story, and I hope the P&F chart above helps subscribers to see the big picture.
And that's all for Thursday -- signing off -
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://www.dowtheoryletters.com/dtlol.nsf
September 26, 2003
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
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