Reply #1: Market Observation [View All]

[ozymandius]

Gold & Gold Stocks Setting Up for a Strong Second Half?
BY CHRIS PUPLAVA

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Gold Technical Indicators Oversold

Over the last year I’ve developed two indicators to help identify major tops and bottoms in gold. As seen below, major tops have been witnessed when the FSO Gold Technical Indicator #1 is north of 2, and February’s reading of more than 4 led me to believe that gold was due for a correction. Readings north of 2 and especially north of 3 are often followed by significant corrections in gold, with the prior occurrence seen in early 2008 when gold first neared $1,000. After that overbought condition gold fell more than $200 over a multi-month correction. A similar occurrence was seen in 2006 when gold jumped to over $700 an ounce for the first time since the 1970s bull market. That overbought condition resulted in a sharp sell off in gold and more than a year long consolidation before gold moved higher. In contrast to the last two readings of the indicator north of 2.0, the overbought condition in February resulted in a moderate pullback with a multi-month consolidation to work off the overbought condition. A market that works off an overbought condition through a consolidation rather than a correction is a sign of strength as it indicates that the bears could never really gain the upper hand and drive prices lower. This is what was seen in gold after the February reading north of 4.0, the most overbought reading seen in 26 years, where gold simply consolidated rather than stage a significant correction. The FSO Indicator #1 is approaching -0.5, with readings in this vicinity often marking major bottoms in gold over the last decade.

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The USD, Setting Up for Retest of the 2008 Lows?

Perhaps another key element to a significant rally for precious metals in the second half of 2009 would be a break in the USD Index below the May lows to set up a retest of the 2008 lows. After peaking in March of this year the USD Index has been in a defined declining trend and is currently battling to hold above 78. Looking at the relative strength index (RSI) shows that USD Index may be nearing an important juncture as the rising RSI trend line (green below) is approaching the declining trend line (red below) that has been in place since the momentum peak in August of last year. Since then there have been two prior periods of the RSI rising to meet the declining trend line, and breaks through the rising green RSI trend line have marked intermediate tops in the USD. We are at a third occurrence with resolution likely to play out soon as the USD is currently testing the declining RSI trend line and a break through to the upside would be bullish and may signal that the declining trend in the USD since March is over. However, a break through to the downside of the rising green RSI trend line and a break below the late May lows could signal the USD is continuing its slide and set up for a retest of the 2008 lows.

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