Saturday, November 14, 2009

Bullish Signal: Interesting Step Pattern Developing in Gold

An interesting bullish staircase pattern is visible in gold prices. Jim Sinclair calls this pattern the swiss staircase and he views the pattern as an indicator that prices are headed much higher. We enclose a graph of this step pattern posted by Trader Dan Norcini on Jim Sinclair's website below (second chart). Since the price of gold on the right axis is not visible in Dan's chart we have posted the first chart as a reference for our readers.
Money Morning explains the technical rationale behind this step pattern formation:
As asset prices rise, they often initially overshoot. Then they correct – fall back a bit. Then they consolidate, or trade sideways, usually for a period of six to 18 months, but sometimes for even longer. It’s this period of sideways trading that creates the horizontal step – a technical-analysis tool that lets us see the foundation for the next step up in the long-term uptrend.

We find these patterns extremely interesting as we are long term bulls on gold. However we would like to caution our readers that in the short term gold prices could correct and this pattern could get broken. The main reason we are cautious over the next few months is that although the Fed would like to see the dollar depreciate much further, the same is not true for the europeans (as we highlighted in our post yesterday), or the asians. Given that the U.S. dollar index (USDX) (currently at ~75) is not too far from its all time low of ~72, and the fact that the Euro (currently at $1.50) is rapidly approaching its all time high of ~$1.60 versus the U.S. dollar, we expect a short term rally to occur in the US Dollar Index which will take the dollar higher (euro lower) before it falls back and breaks the 72 level. The europeans and asians will not let the dollar break 72 without a fight. This fight will ofcourse prove futile in the long term, but it could cause gold prices to correct in the short term.

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