Friday 25th April 2008 8:20 pm: Ominous double head and shoulders in gold Target $600?
Alan Bush (probably no relation) has an article with an interesting chart on Kitco at the moment. As soon as I saw the chart, I thought, "Oh-oh!" It looks like a 'nested' double head and shoulders is forming. Potential head and shoulders tops have appeared before but this one is bigger and more ominous. There is a hint of a double top with a neckline at $875 and peak over $1000 on his weekly plot. Target for this would then perhaps be 800 or so. This would bring a larger potential double top into play, since there was a failure at the first test of $850 resistance late last year and a pullback to $800. There is another useful weekly chart at http://www.stockcharts.com/h-sc/ui?c=$gold,uu[w,a]waclyyay[pb50!b200!f][vc60][iut!ub14!la12,26,9]. This chart shows that if gold were to bounce at the 50 week moving average at about $800 (or select their daily chart and look at the 200 day moving average around $825), it could form the right shoulder of the large Head & Shoulders pattern, which would be level with the left shoulder also at $800 or so. A breakdown from there would have a price target of $600.
So in the short term, if there is a drop below $875 and we see a breakdown to $800, watch out for a rally to $850-875 and another failure at that level followed by a return to $800 again. This would make that larger head and shoulders with a clear target around $600, back in the trading range of late 2005 to mid-2007, wiping out the entire spectacular upside move since.
On the other hand, there was a left shoulder in the big upmove from November 2005 to May 2006 that did not give rise to a H&S formation on the other side during the subsequent correction. The left shoulder in the late 2007 to early 2008 upmove is almost identical. Maybe now we could go into a 'triangle consolidation pattern' again as in late 2006, but this time some exogenous event(s) in the banking system could change things very quickly. There is a great difference between now and 2006. In 2008, the credit crunch cat is out of the bag and the housing market decline is well under way. What a fascinating market situation!
You can be sure that the enemies of gold will be trying to get it below $875 to break the first H&S on the downside and aiming for the second, much larger one whose neckline is at $800.
With oil at nearly $120 a barrel, it might be difficult for them to succeed, but they have a lot of aces, all our taxpayers money and the power to print as much fiat paper cash and create as many electronic credits for themselves as they want, at our expense of course!
"The credit crisis is already over and everyone has breathed a sign of relief, even the Financial Times in the UK. The scare has been overdone and the good times are going to roll again. Housing prices are not going to revert to the mean, presumably ever." Do you believe that?
Well, maybe they won't if we get a hyperinflationary depression!
See the posting four on from this one, written 3 May, entitled Fibonacci points to $600 gold re:1974. 2008-05-03! Meanwhile...
Added Saturday 26th April: Kitco links to an article that says Dubai gold demand moderate despite price slide, so maybe we are not out of the woods yet! End of week close on gold: $886.00/886.80 Bid/Ask on Kitco. one year performance is still +$202.00 +29.53%, even though we are $140 off the high. That shows what a run-up we had at the turn of the year. Maybe that up move was a bit overdone for the time being.