Gold will Shine in Weeks Ahead

Every dog has his day, the old saying goes, and gold will be getting his in the weeks immediately ahead.

While it is never good policy to be dogmatic when forecasting the gold market these days—especially in light of the enormous selling campaign surrounding it—the tape presents a picture so remarkably clear and emphatic that we have no reservations in asserting our short-term bullish convictions on the metal. This is not to imply that gold's long-awaited major bull market has begun. That has yet to be determined, and it will likely be a while before everything is in place for gold to begin a sustained upmove. What it does mean, however, is that at least in the near-term gold will finally get its due (and perhaps knock quite a few deserving shorts into the water along the way).

Let's begin first with the intermediate-term picture. Gold's daily line chart is quite impressive. After commencing a long slide from the $290/oz. mark, gold continued in a four-month free-fall that brought gold's price as ow as the $253/oz. level. Prices met with strong support at this level and immediately bounced higher to its present level of around $263/oz. In doing so, a multi-month parallel trend channel was broken and should now serve as a base of support as gold attempt to get going and retrace its losses. Gold is also currently supported by its 10-day and 30-day moving averages.

The daily bar chart for gold is even more instructive. Looking at the action for the past month yields many insights. For instance, an exhaustion gap appeared in the chart in July which gave advanced notice that the falling trend was nearing a climax. True to form, gold registered a bottom a few days later, a chart pattern known as a "tweezers bottom" (see Technical Analysis Simplified, pg. 91). From there gold commenced a three-week rising trend to where we are today at the $263 level. The daily bar chart is giving notice that the immediate trend may have been exhausted and prices are nearing an overhead resistance level so we will likely witness at least a few days of falling prices before the next leg of climbing gets underway.

The good news is that in rising from its floor of $253 to its current $263, gold successively passed a critical technical test known as the "Fan Principle" (see text) which involves overcoming three consecutive resistance levels. Gold passed the fan test with flying colors and will now likely find support on the third "fan line" before beginning the next leg of its advance.

Of further interest to gold futures traders is the fact that open interest on the Comex has been rising of late along with gold prices, whereas open interest was falling during gold's decline of this summer. Generally speaking, open interest always expands with the predominant price trend and falls during countertrend moves, so we may assume that traders are beginning to take long positions in gold in anticipation of a nice rise.

Indeed, our momentum indicators point to this as a probability. Gold's 10-day Rate of Change (ROC) oscillator is in a firmly bullish position and shows no sign of deterioration. This means that gold at least has short-term momentum on its side in the days ahead. Gold's 30-day ROC is coming off of a deeply oversold position—one of the worse we've ever seen for this indicator (which provides a pictoral example of how much gold is loathed among the world's selling interests). However, this indicator is also in a bullish position and shows that gold definitely has momentum on its side right now.

On Balance Volume, which is also coming off an oversold position, is now expanding in the direction of higher prices and is about to pass into bullish territory. So gold has volume in its favor, as well, a very positive sign.

Even more positive is the fact that the leading gold stocks are finally starting to show signs of life. For the first time in almost two years we can finally recommend the blue chip golds based on their collective technical position. The leader of the blue chips—Barrick Gold (ABX:NYSE)—is flashing all kinds of bullish technical signals and is a definite buy at its current level of $23 5/8. Many other gold stocks beckon for our attention, as well.

In sum, gold presents a value right now, though there is guarantee that this rallying phase will signal the start of a new bull market for the yellow metal. We are not advocating taking long-term positions in the gold sector at this time; however, we definitely feel it presents a safe haven in the near-term. As for the long-term, whether gold must first sink to new lows before ending its 20-year bear market or not is not yet known. But one thing is for certain. Gold is definitely nearing the end of its long decline and we must stand ready to take advantage of this lifetime opportunity when it finally beckons.