I've been looking so long at these pictures of you
That I almost believe that they're real
Been living so long with these pictures of you
That I almost believe that the pictures are all that I feel
--The Cure

The technical concept called box theory was made 'famous' by stock market speculator Nicolas Darvas (1960). It proposes that, in a bull market, prices advance in cells or boxes that can be readily charted.

We can apply box theory to the bullish move in gold over the past three to four years. Parenthetically, similar patterns are evident in the SPDR Gold Trust (GLD) and similar exchange traded funds. Four boxes have defined gold's move off the lengthy base in 2005. Each box has ranged roughly $150.


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Moreover, two different types of boxes are evident. An ‘advancement box’ has been characterized by a rapid price rise through the entire price range, a small pullback hesitation and then a move higher. That move carries into a ‘consolidation box,’ where prices spike up to the top of the box range, pullback through much of the price range and then endure a period of consolidation before heading higher into the next advancement box.

Viewed through this lens, gold currently rests in a consolidation box ranging from about $850 to $1000. In the previous consolidation box, prices spent more than a year moving sideways before powering higher.

While the small sample size of boxes doesn’t provide much statistical confidence in the current pattern’s predictability, it's interesting to ponder whether a similar period of consolidation is necessary before a measured move higher in gold is more likely.

On the other hand, a pronounced move below $850 that dives deep into the previous box would upset the bullish pattern. Should this occur, probability of a more prolonged moratorium on gold’s bull run seemingly increases.

References

Darvas, N. (1960). How I made $2,000,000 in the stock market. New York: Carol Publishing Group.