Jul 20, 2011

Gold Rally Close To An End?

Gold reached historical high and many investors are questioning further rise. In following post Elliot Wave analysis and Fibonacci levels are employed in order to predict following gold price move.
The source of long-lasting gold rally could be found in financial assets instability. As a common rule during severe crisis after conventional instruments are exhausted alternative stimulus is established in form of pumping money into the financial system also known as quantitative easing. That lowers currency rate, which helps economy returning back to growth by boosting exports, but inflates commodities. US stimulus started late 2008, depreciated dollar exchange rate from 1.25 per euro (10/2008) to 1.50 (11.2009) and inflated gold price 100% since beginning of 2009 to present.
During last ten year gold rally the only significant correction occurred in 2008. The year of the fear and financial collapse did not spared the precious metal. However the trend was not broken, gold traded above 200 moving average even in that turbulent year. Later when printing machine started the only way for gold was up.
End of June 2011 quantitative easing was officially terminated gold still still rockets the sky. There is another problem keeping it so precious - debt burden threatens credibility of most developed areas as European Union for example. Recent debates for another US debt ceiling raise undermine the dollar. Summarized all those factors leave average investor with limited options for investing. Even government bonds considered riskless now bear higher risk. In such situation gold is perceived as safe heaven investment and price is raising constantly. Unfortunately investors easy forget that market prices have two directions and downside is often possible. Same apply for gold. Maybe the turning point has come?
Previous two gold corrections formed corrective Elliot waves 2nd and 4th.  According to theory each cycle consist of 5 waves positive trend and 3 waves corrective. More details regarding Eliot Wave Theory. On a 10 year chart we distinguish four completed waves. First gold correction during period 2004-2005 is triangle shaped while second appeared 2008 is classical 3 impulse correction. Since then there are almost tree years bull market without significant slide. Is now time for finishing fifth wave, which is last before sharp drop? Applying Fibonacci ratio for 2008 correction gives us important levels around 161.8% and 261.8% retracements. That is $1247 and current strong resistance $1600. Braking last level is crucial for the precious metal. 
Gold Price Close to Important Resistance

Chart source: Saxotrader, Chart analysis: investink.net
If price fail to brake $1600 this could confirm fifth wave and set the beginning of sharp and prolonged correction. Fundamental factors, however, suggest opposite. As long as risk aversion is high gold will find its ground higher. Debt burden and consequent deleveraging process usually takes a lot of time which could limit investment opportunities for a while and gives gold advantage. The forecast for US growth is slowing to moderate and under potential. If economy doesn’t show firm signs of recovery QE3 is option for FED pushing commodities and gold prices to another sky levels. Thus until all problems resolved buying commodities on a dip seems reasonable strategy.
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Silent gold correction

Jul 15, 2011

Gold Tech View

Gold proved to be best performing asset in recent turbulent days. As suggested in previous post (Silent gold correction) it broke its resistance level $1560 reaching new historical high. Now many investors are curious is there any more room to grow. Considering current situation of growing concern over credit credibility of most developed countries there is strong support for the metal. All growing risks and uncertainty in the system is bullish sign for the precious commodity. However every experienced investor knows that direction of every asset is not only north. Risks for gold correction are real, although do not seem to appear in short term. Debt burden is long term problem and governments around the world started realizing that now take necessary steps to limit it. Steps in this battle are US debt ceilings debates and efforts of several European countries to cut costs. It takes time to turn back to normal fiscal policy but when those measures give first results gold is expected to step back as it is considered safe heaven in raised market volatility. In short run we could expect test of the breaking level around 1560 after positive move is restored. This pull back could be short lived because rising concerns over US debt rating cut (now 50% probability) will depreciate dollar. Cheap dollar will inflate the gold as it is often perceived substitute.
Gold Brake Consolidation Triangle
Chart source: stockcharts.com, Chart analysis: investink.net

Jul 14, 2011

Next market wave

Despite recent sharp drop markets realized significant gains last 2 and a half years. After severe 2008 decline stocks (in S&P500) gained 19.67% in 2009 and 12.78% in 2010 and 4.95% year-to-date. However signs of fading recovery strength have lowered expectations and put stock prices under pressure last days. In addition rising debt problems in Europe clouded the summer investor mood. Those fundamental factors determine general market direction but markets are people driven system and thus human behavioral patterns exist.
Elliot wave theory
R.N. Elliott's essay, "The Basis of the Wave Principle"
Most widespread method for counting cycles is Elliot wave principle. In theory Elliot wave principle is based on collective investor psychology or crowd psychology. According to that in bull market each cycle consist of two stages - one 5-wave positive move – dominant trend and 3-stage corrective trend. Within the first move waves 1, 3, 5 are positive and 2, 4 retracing.

Using this principle in practice gives us power to predict coming bull markets or corrections but only in case we are sure that our counting is correct. Sometimes is hard to imagine that markets follow certain pattern because market trend is determined by independent not necessary repeated events. Here dominant is crowd psychology and chart proves it.
s&p500 chart analysis
S&P 500 Expected to Pull Back
Chart source: stockcharts.com, Chart analysis: investink.net
If Elliot wave theory is applied to the latest trend started with march 2009 bottom we can follow tree completely formed waves up to current moment. The first one from dominant trend (labeled with blue square) is consisted of 5 subwaves as described in theory. Second corrective wave started April and finished august 2010. Third, which again is formed from 5 subwaves, marked its top May 2011. How
can we be sure this is the end of third wave? Pattern formed from recent market move has appeared to be classical head and shoulders - trend reversal formation (for more details see latest S&P Technical Outlook). If theory is correct again we are at the end of 3rd wave which should be followed by 4th corrective. Closer look at fundamental factors proves that might be the case for summer months. European dept crisis pushed world markets under great pressure. Moody’s raises pressure for US debt deal,  China’s growth is slowing and speculations for hard landing are rising. Those factors rise risk in the system and as consequence we see new gold price record and high market volatility. Should market confirm its down trend with lower highs and lower lows next support for S&P500 is 1175, completing 4th wave.

Jul 8, 2011

Where is market headed?

Recent recovery from June 16th bottom has proven to be sharp one, but considering current fundamental data is it sustainable or is just another speculative move for profit taking?
In our recent technical post we noted the broad S&P index as forming second shoulder for the technical formation head and shoulders. This might be the turning point as latest jobs data contradict with recent steep market rise. There is no analyst who will disagree that US labor market is far away from stabilizing. With unemployment rate at 9.2% and 18K jobs added for June the trend is not expected be reversed soon. Jobs creation has to be at least 120K in order to see slow down in the rate. Recent data again question the efficiency of QE2. In theory rising liquidity should support inflation which push down unemployment. Data shows this is not the case now. Is it time for QE3? Although Bernanke firmly denied next round of quantitive easing the ensuring growth is essential for FED and for the whole economy.
Unemployment rate, monthly

Chart source: forexfactory.com
In investment decision one should consider coming earnings season. Despite ongoing consumer deleveraging, which translate to weak labor market, companies are expected to post stronger results with S&P operating earnings at 15% gain on yearly basis and 5% on quarterly (Standard & Poor's predictions). This would limit downside move of the markets. However should expectations seem to be overestimated the downside pressure will be serious firing new doubts about growth and recovery.

S&P long term earnings
Chart source: Standard & Poor's and Robert Shiller
See also:
US Really Getting Out Of Recession? Cross Sectional View Of Key Economic Measures
S&P Technical Outlook

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