A Sharp Plunge – A Lateral Move – WHAT NEXT?

Gold plunged through support a few weeks ago…followed by a basic lateral move.  Speculators are now waiting for the next move, but which way?  Here again we have to go to our technical picture to see what the odds are one way or the other.

Readers may recall that in my last post (for 30 Sept 2016) I showed a gently sloping flag or box pattern indicating this is usually a continuation pattern following a previous bull move. However, I would need to wait for confirmation from the charts before acting.  GOOD ADVICE.  Within days gold plunged through support below the box. The plunge only lasted a couple of days…and has now gone into a lateral period, although with minor upward pressure. The plunge has caused great damage to the technical picture. Consequently, a recovery, should it happen, may be slow and torturous.

Long-Term

The long-term picture has continued to weaken…but is a little confused.  Although gold has dropped and remains below its long-term moving average line, the average line itself has been moving almost perfectly horizontal without direction indication.  Since the previous direction of the moving average line was positive and has now changed to neutral, one can only assume that the next turn will confirm a negative slope to the line. The long-term momentum has been sliding along the neutral line for several days, but has now moved slightly into its positive zone and above a negative sloping trigger line.  For now I can give the long-term a rating of – NEUTRAL, just one step above a full bearish rating. 

Intermediate-Term

There is nothing much good one can say about the intermediate-term position of gold at the Friday close.  It was already bearish before the plunge…and remains so now.  Gold remains below its negative sloping moving average line - and the momentum indicator remains in its negative zone, although slightly above its positive trigger line.  This may suggest that the negativeness is diminishing…although not yet overcome. The intermediate-term rating remains BEARISH.

Short-Term

The short-term chart is not quite as negative as the other time periods…so maybe a rally of sorts may be in the works.  Gold has closed the week slightly above its short-term moving average line, but the line is still in a negative slope.  The short-term momentum had been in its oversold region. However, it has now moved above the oversold line for a show of strengthening.  Moreover, it is still in the negative zone but above its positive sloping trigger line.  What does all this tell us?  Well, the rating is a + NEUTRAL rating just one step below a full bull. 

Although the short-term is strengthening and suggesting a potential rally on the way, I would be very cautious here as the previous plunge just took away a lot of bullish steam out of the market. Furthermore, any short-term rally may be just that…a rally not a reversal of trend.  Anyway, let the on-going charts tell us what’s what.

Predictions And Other Stuff

I often am asked two questions, “What is the market doing and how far will it go?”  The first question is answered above.  As for how far will it go, trying to predict the extent of a move is a fool’s game, so here goes.

Technicians have different ways of trying to predict how far a move will go.  From various patterns and trends one might estimate the final move, but I primarily rely upon my point and figure (P&F) charts.  This is not the place to go into a P&F seminar.  There are different ways of using the P&F chart technique to gauge a move resulting in different end results.  One picks the methods one is comfortable with and have provided the best (never perfect) results.  I have run several different scenarios and the results are as follows.  Short-term it seems like $1190 is the best guess.  Intermediate-term the number that keeps coming up is $1100.  On a longer term I get $980 as the projection.  For a very long-term projection, well let’s not worry about that unless things get really weird.  Some of these numbers may be slightly different than that projected earlier…but as daily action adds to the charts the projections change, until a confirmed reversal is in effect.

One should NEVER ignore negative (or positive) divergence in a momentum indicator versus price action.  I know I have shown this before but a very good example of a well established negative divergence is shown in the gold chart.  Note that the momentum was not able to come even close to a new high in early July while the price of gold was making its new highs.  Such a divergence is a very good sign of problems ahead and that is what happened. 

Also shown on the gold chart is my (bearish) Diminishing Fan Principle Trend Lines.  The breaking of the third Fan trend line confirms a reversal in progress and this occurred a day before the plunge in price.  Although I have no real data to verify the extent of the move using the Fan Principle, I often look for a move back to the apex point of the Fan. This would be to the $1050-$1100 level.  Again that $1100 number appears.

Gold And Silver Stocks

Gold and silver stocks took a serious hit a few weeks back, but look to be recovering somewhat this past week.  The major Indices lost between 26% and 29% over a few week period -- but have recovered 7% to 8 % of that last week.

Merv’s Gold & Silver 100 Index

The Index was updated this past week to include the latest largest 100 market value gold and silver stocks trading in the North American market.  The chart this week shows the Index going back to its peak in 2001 with a very long-term moving average line and momentum (representing a one year period).

From its peak a few weeks ago the 100 stocks lost an average of 18.5% to its low but recovered 8.0% of that this past week.  What this suggests is that the largest stocks which are overweight in the major Indices had a more significant decline than did the average gold and silver stock.

Unfortunately, I have to cut the commentary on the stocks short for this post.  Although I am not posting every week I will try to get a post next week with emphasis on the stocks rather than the commodity (unless something major happens in the commodity).

As a quick summary, the Merv’s Penny Arcade Index lost 16.8% during the past few weeks and recovered only 2.0% of that this past week.

The Merv’s Silver 30 Index lost about 22.1% over the past few weeks and recovered 6.2% of that this past week.

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Readers are invited to view my Facebook page at https://facebook.com/merv.burak where I will be slowly posting commentaries explaining in more detail my various indicators and techniques. I also present from time to time some individual stocks that look as if they may be good speculations.  However, nothing I post is meant to be a recommendation to buy or sell.  One should check with their broker or investment advisor before acting.