Gold Takes a Big Hit so now What?

  I have to tell you I really did not like the down move today in the gold price. It broke through the sideways trading range we were in and we saw some pretty heavy downside volume as well.

I can only imagine how frustrated gold bulls are at this time having been so patient since this whole long consolidation started way back in early 2008.

There are number of different operating parameters at play here that are worth summarizing and pointing out so that we have some guideposts for what to expect.  The worst thing about trading and following markets is when you have a certain bias, the market turns on you, and you have no clear perspective why it happened or how much worse it could get.

Sometimes it seems these markets move in slow motion and the final decisions they make sometimes take many months or more, so it can make it even more frustrating when things turn on you opposite to what your bias was.

Anyway, let us just take a quick look at the GLD ETF chart on the monthly scale which is my favorite time frame to look at because it shows the bull moves and the bear moves with plenty of long term clarity.

The main point to be made about this monthly chart is the long white up trendline that has been in force since 2005.  In 2008 that up trendline was pierced only briefly and then price rallied back up above the line and so far has held above it. 

Piercing that up trendline like that makes it slightly weaker. For now that is a mute point but it is something to be aware of.

Anyway before I go on I want to summarize in bullet form the main things happening with gold on a big picture basis:

• We have a large head and shoulders bottom formation since March 2008
• The left shoulder is almost as symmetrical as the right shoulder in terms of time
• This entire head and shoulders bottoming formation is part of a much larger cup and handle pattern that goes back to 1980.
• So far the gold price has held up trendline support since 2005
• The two monthly price swings indicated in the chart above by the very long red arrows are significant because the most recent monthly swing tested the first swing on 48% greater volume. This implies that the high of the first swing will eventually be overtaken
• To keep the head and shoulders bottoming formation intact AND the up trendline support intact it is important that we do not see GLD break that much below the 85 level.
• The MONTHLY MACD remains in a bearish stance and so far has not activated a new major bull leg signal. We must respect this fact and carefully observe for the next significant change with this indicator.

This bulleted summary pretty much says it all for the next 6 months going forward.

Stay tuned.

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