Gold Futures Week in Review

We wrote last week (Oct. 28) that December gold had arrived at another one of those tell-tale crossroads and would be forced to make a decision on Monday as to whether to continue onward with its rally from the previous week or reverse sharply beneath the combined weight of a 4-week line of supply in the daily chart. Gold responded by breaking through this overhead supply and rallying up to our minimum upside target of $320 before encountering resistance. If you will recall, the chart featured in our previous gold futures commentary showed a classic convergence of dome and bowl, with prices at that time having bottomed at the precise mid-point of the parabolic dome in the daily chart. We've updated this chart below.

As you can see from the above chart, December gold has encountered the parabolic dome, which has acted as a strong resistance against gold's recent rally. You can see where the previous downtrend line (representing immediate overhead supply) was broken just above $314. This led to a rally which fulfilled the minimum measuring implications of the trendline breakout, and gold bumped up against the rim of the parabolic dome at $322 on Friday, Nov.

Obviously, this shows more immediate overhead supply pressure that must be overcome before gold can resume its rally. This will take place when the parabolic dome shown in the above chart is penetrated. This could happen by gold closing above its Friday intraday high of $322, or perhaps by a few days correction followed by another upswing through the dome at a lower level. Either way, once the dome is penetrated gold will be on its way to test the recent highs near $328.

Let's assume a worst-case scenario where gold declines sharply during the week of November 4. Ideally, it should bottom at or above $316 in order to ensure maximum leverage for another attempted breakout above the parabolic dome. Not only does $316 represent the pivotal point in the daily chart but it's also where the rim of a 20-week parabolic bowl intersects to provide potential support. But technically gold has downside support to as low as $311-$312, the lower rim of the smaller parabolic bowl in the daily chart and also where a 12-week uptrend line intersects (see above example). If gold fell to $311-$312, then broke out of the dome from there it would take the shape of a "W-bottom" in the daily chart. Closing beneath $311, of course, would annul the bullish short-term outlook.

In support of a bullish short-term outlook, our Gold Stock Volatility Index (GSVIX) has turned down dramatically after double-peaking in late October, suggesting that the recent correction across the gold stock sector is over (at least temporarily). Gold stock put option premiums are declining on a rate of change (ROC) basis while call premium ROCs are starting to rise, another positive sign.