FS – Gold Could Correct To $1,500: Technical Analysis

http://www.financialsense.com/contributors/nu-yu/2011/08/25/gold-could-correct-to-1500-technical-analysis

Gold is in the second phase of a Bump-and-Run Reversal Top pattern, which typically occurs when excessive speculation drives prices up steeply, and is now at a critical juncture where substantially lower prices could be realized. Let me explain.

According to Thomas Bulkowski, the Bump-and-Run Reversal Top pattern (read here for details) consists of three main phases:
1.A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
2.A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.
3.A run phase in which prices break support from the lead-in trend line in a downhill run.

As the chart above shows the price of gold has breached the sell line at $1,830 so we can expect to see a correction with downside price targets for support as follows:
1.$1,750 for support from the dotted pink line.
2.$1,650 for support from the warning line.
3.$1,500 for support from the lead-in trend line.

Original Source: http://fx5186.wordpress.com/speical-mid-week-update-8242011/

What took place in silver during the months of January through May should be a lesson that no asset, no matter how good the fundamentals are, can sustain parabolic moves. The article above is one of the few that I have seen recently that has been viewing the current run in gold from a more objective viewpoint. The article uses a geometric form of technical analysis which is an aspect that is often overlooked as the charts do follow certain forms of symmetry that can sometimes be amazing.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

5 Responses to FS – Gold Could Correct To $1,500: Technical Analysis

  1. Rene from Cape Cod says:

    I own quite a bit of gold, so what you are saying, is that I should sell my gold now, or anyone who bought gold above $1500 should sell now.

  2. Aaron Basile says:

    You are not a trader Rene, correct? I wouldn’t advise anyone who is an investor to sell their long term holdings. Besides, gold isn’t necessarily going to $1500 based on this article.

  3. Rene from Cape Cod says:

    You could be right, but if tomorrow the USD index would fall even more or our fiat currency would crash or if Bernanke initiated QE3 or we would be forced to default, gold would go far beyond what it has been.
    There are political reasons, I believe that would supersede Bump and Run Reversal Top Patterns according to James Turk, CEO of Goldmoney who says gold could go to $8000 per oz.
    What say you, Aaron?

  4. Aaron Basile says:

    Well first, the US can’t default because our government does not require a bond market to keep yields low… even so there is no chance that the US would default before any of the European nations. About QE, Bernanke won’t initiate QE III until at least next year I think. He has far too many of his own FOMC board members who are already against the idea of another round.

    Regarding the dollar, the QE programs can’t cause a crash in the USD. The reason is because there is no demand for credit and if there were, inflation would already be much higher than it is now.

    Also, I think you are missing the point of my I posted the article. It’s not because I share the author exact view, it’s because it is one of the few articles that I have seen recently that takes a sober stance on the direction of the price of gold when everyone else is hyping it as much as they can.

    • Rene from Cape Cod says:

      Never has the US been in this massive debt predicament. Have you seen a historic debt chart? The line is now straight up. We are now into exponential debt numbers. Our debt is larger than the combined debt of the world. We have 45 million hungry Americans on food stamps, our unfunded liabilities are $115T. We have almost 24% of actual unemployment.
      So talking about debt? We’ve got it, along with an interest rate of almost 0. These are very bad combinations, along with so much printed paper or just mouse-clicked worthless currency.

      Dr.Chris Martenson produced a video series called “crash course”. He figured out that when the powers that be will actually admit we have a problem we cannot get out of—it will be too late. Many believe this is close.

      Regarding the USD, it will go the way of all fiats of history, back to 0. Now the USPS is looking to be bailed out. They are out of money. I have a fix for them. Have the government take their hands out of it and have corporations bid on ownership.

      I believe we have a president who is a Goldman Sachs wind-up toy… a JPMorgan marionette, owned by Wall Street and a one man wrecking ball who will take this country and the dollar where it has never been before.
      Do you think our debt can be paid and have enough money for those unfunded liabilities. They say that mathematically it cannot be done, including Chris Martenson.

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