Cart (0)
VIDEOWhat September Means for Gold
By
Przemyslaw Radomski
Sep 08, 2010 3:20 pm
A rally and a correction are possibilities, but the second half of the month is likely where the action will be.
 |
|
I studied the charts for a 10-year history of gold prices. The most obvious pattern through the decade is the presence of an August correction in nearly every one of the 10 years. So is the September rally nothing more than a reversal of the August downturn? Not necessarily, as there are also fundamental patterns involved, but the move is generally amplified by the fact that gold was correcting in August, and that it's ready to rally. If so, then the September effect couldn't play out in the way many investors expect it to (immediate surge in prices).
The months of August and September have been outlined as the focal points. Please take a look at the gold chart for 2002, for example.
Now let’s take a look at 2003, below. There was clearly no August correction in that year, and there was no clear rally in September. In fact, the August rally resulted in a September correction. Does this seem at all similar to 2010? Have we not seen gold rally for the entire month of August?
Now, let’s examine another possibility. Perhaps investors have been waiting to see a September rally based on historical trends. The thinking might go something like this: If there's going to be a huge September rally then why would I sell just before it? It's quite possible that if higher prices aren't seen very soon, these investors will reluctantly liquidate their positions and this could be the impetus for a bigger correction in gold’s price. The outlook for gold appears to be more bearish than bullish -- taking the next one to three weeks into account -- when all these factors are considered.
There's another fact that simply can't be omitted. On average, the rally starts in the middle of the month, as you can see clearly on the chart below.
Please note that even if we agree that gold is to rally in September and the rally will be strong, the odds still favor that taking place in the second half of the month.
Having briefly commented on the situation in the yellow metal itself, let's move to the mining stocks.
Last week we saw that gold stocks again failed to move above the rising resistance line. This is quite similar to the scenario for gold itself in recent days. No decisive move higher -- although impressive on a day-to-day basis -- has been accomplished either. The prices of precious metals stocks did move higher in the past days, but they didn't break above significant resistance levels yet. Look at the short-term chart for more details.
In this week’s short-term chart of Market Vectors Gold Miners ETF (GDX) we see that mining stocks are right at the multi-month resistance level, which is indicated by a red line on this week’s chart. In addition, the rising resistance line was also not broken. The indication here, therefore, is that lower prices are likely before any additional rally can materialize. Furthermore, lower volume levels may be an indication that buying power is drying up, which would further support a likely decline in prices.
There seems to be some indication at this time that points to the possibility of a huge rally following the likely correction that we've been discussing. One factor, which supports this hypothesis, is the possible formation of a cup-and-handle pattern in our chart. The cup portion of this pattern would actually be where we are today and the handle would be formed by a correction, which I see as a real possibility very soon. The likely bottom would then follow in mid-September with a subsequent rally in the weeks to follow.
Although this is quite speculative as of now, I'm looking at all possibilities and feel that this is worth mentioning due to the positive risk-reward ratio, which it would present.
This week I looked at the Gold Miners Bullish Percent Index, which I find to be a reliable way to analyze current trends. The Williams %R and RSI showed that we're in the overbought territory.
Signals coming from the mining stocks indicate that a correction is very possible and may be seen very soon. This will quite possibly provide excellent opportunities for investors to enter the market with favorable risk-reward ratios and tremendous profit potential.
This week I received an interesting question about technical analysis and if it's still reliable when global fundamentals -- things like quantitative easing, Europe's problems, China's rapid growth, etc. -- are changing.
The most important fundamental that doesn't change over time is human psychology and emotional behavior of individual investors. This is something by far more stable than even several bouts of quantitative easings. China's growth won't cause people to stop being greedy when they see higher prices and fearful when they see them decline. Europe's problems won't cause people to act by means of cold logic alone. Technical analysis's foundations are based on real mechanisms, which are inherent parts of human nature, and that isn't something that's going to change any time soon.
Trade ETFs? Take a 14-Day Free Trial to Mike Paulenoff's MPTrader newsletter. Receive specific trades and strategies across all sectors. Learn more.
For the full version of this essay and more, visit Sunshine Profits' website.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
