(GC) Scale Considerations for Navigating Gold Market Consolidation

Technicals, December 13, 2011; 7:55am

On a short-term scale detailed in the 240-min chart below, there is little question that the trend is down. This decline was initially exposed by 05-Dec's short-term momentum failure below 01-Dec's 1737 corrective low, and then reaffirmed with last Fri's break below 06-Dec's initial counter-trend low of 1705.7. Yesterday's sharper, more obvious weakness and clear break below the 1705-area support leaves this 1705-area as new resistance and defines Fri's 1727.9 high as the latest corrective high and risk parameter the market is now required to recoup to jeopardize the impulsive integrity of any broader and more immediate bearish count. In these regards, a cautiously bearish policy may be pursued, but we believe only on a rebound attempt closer to the 1690-to-1700-range where the requisite 1728-area buy-stop would produce a preferred risk/reward ratio. Given the market's encroachment on the lower-quarter of the past 3-1/2-months' lateral range, we do not advise chasing bearish exposure lower.

Indeed, taking a step back in scale to consider the past four months' price action on a daily log close-only chart below, it would seem that chasing bearish exposure at the lower-quarter of the broader lateral range would result in a poor risk/reward play as only the hope of a downside breakout below 26-Sep's 1594.8 low would produce the pay-off commensurate with the requisite risk of such a larger-degree play to at least 02-Dec's 1751 high, let alone 08-Nov's 1799 high. It's fine to have a bearish short-term bias with an equally shorter-term risk parameter like the 1728 level mentioned above. But having such a smaller-degree risk parameter to protect a longer-term directional expectation is outside the bounds of technical and trading discipline.

Against the secular bull trend backdrop that we'll discuss in more detail below, we believe that the counter-trend behavior from 22-Aug's 1891.9 all-time high close to be a corrective/consolidative environment that ultimately will produce at least one more round of new all-time highs amidst what would likely be very emotional circumstances. The technical and trading challenge at hand however is negotiating the current correction, both the pattern structure and scope of which remains an unknown.

Corrections typically unfold in one of two ways- quickly and violently with steep price moves or in a more frustrating, lateral manner that puts a shallower dent in the broader trend. While 26-Sep's 1594.8 low holds, we believe the latter, lateral correction-type has been unfolding. And in this regard, traders are urged to keep their eyes peeled for a bullish divergence in momentum from the lower-quarter of the 1892 - 1595-range that could present an excellent risk/reward buying opportunity ahead of a resumption of the secular bull trend.

Taking an even bigger step back to appreciate the magnitude of the secular bull trend, the weekly log close-only chart below shows the market still well within the boundaries of the major up-channel from Oct'08's 718 low. Per such and while 26-Sep's 1594.8 low daily close continues to hold (1622 on a weekly close-only basis), our preferred count is that the current correction is one of only moderate scope (i.e. the 4th-Wave of a 5-wave sequence up from Oct'08's 718 low weekly close). A clear break below 26-Sep's 1594.8 low would have to be taken as exposing a much larger-degree correction similar to that that unfolded from Mar to Oct 2008 when the market lost 28%.

Given the scope of the secular bull trend from Jul 1999's 253 low shown in the monthly log scale chart below, the process of any major peak/reversal threat could take quarters to unfold before any discussion of which can be seriously considered. But given the high nominal price levels this bull has achieved, even a relatively minor correction could produce sizeable gains or losses. On this scale, this market could easily get whacked by $300 or $400 and remain well within the confines of the long-term advance.

Prognostications on what ultimate heights this secular bull trend could reach- after it finishes frustrating the masses with the current correction- are all over the map. And as ours, they're a dime a dozen. But as long as there's some objective basis to the forecast, it's fun to speculate. And in this vein, we'd like to point out some interesting Fibonacci progression relationships in the quarterly log scale chart below that form the basis of our expectations of an eventual move to the $2,200-area.

Prior to the current 11-year bull trend, the market spent nearly 20 years languishing in a corrective/consolidative structure from Jan 1980's 873 high. Within this 20 years of technical pain however, we find it incredible that the correction-completing decline from Dec'87's 507 high to Jul'99's 253 low came within $0.50-CENTS of the (252.7) 1.000 progression of Jan'80 - Feb'85's preceding 873 - 282 decline. Applying that same 1.000 Fibonacci progression analysis to Jul'99's resumption of the 1976 - 1980 bull from 100 to 873 that preceded it, and the bull trend projects to 2,210. In other words, the same percentage increase from 1976 to 1980's bull from 100 to 873, taken from Jul'99's 253 low, projects to 2,210.

Could such an upside target follow a bullish divergence in momentum from the lower-quarter of the past four months' 1892 - 1595-range? Of course, there's no way to tell. But should such a bullish divergence in daily momentum define a more reliable low and risk parameter from which to make such a bet an objective one per the points raised here, we will certainly inform customers in this Technical Blog space of www.rjomrt.com.

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