A pull back on gold is on the cards, or so the cycles say
THERE seems to be a general consensus that gold is going to continue its recent powerful rally. All sorts of projected targets have been mentioned, from the not too far away $1,050 all the way through $1,200 and even as high as $2,300. Such elevated levels may eventually be reached but for the time being there is an interesting cycle pattern to recent gold price movements that may suggest we could be looking at a pull back in the next week or two. If the pattern holds and you are thinking of going long gold soon, the data suggests that it might be best to wait a week or two before buying.
Before I explain why this is the case, consider gold’s recent price history. Many speculators thought that we were going to see a lift-off as soon as we closed above $1,000 and above gold’s previous high close of $1,004. This hasn’t proved be to be the case: the precious metal topped out around $1,020 (in fact, it looks like it possibly formed a double top on close around $1,016 back in mid September) and since then has hovered around $990-$1,000. Significantly, despite closing at a record high of $1,020.2 on 16 September, it failed by over $8 to breach the previous record intra-day high of $1,033.9.
Many analysts believe that demand for gold above $1,000 is waning and that we could see a pull back. In fact, if you are currently long gold, there are a number of reasons why it might be worth locking in some profit. For the past 12 months, gold has moved in a strikingly cyclical fashion. A quick glance at a chart may not be enough to make this obvious, but if you look closely at some of the timings between significant highs and lows there is a wonderful cyclical pattern, and one that may suggest we could be looking at a lower move for gold in the coming week. Let me explain.
TIME GAP
Let’s start with the low back on 24 October 2008. Given that the next low was on 15 January, we can see that there was a time gap of 83 days between the lows.
The next low came on 17 April – a gap of 92 days since the previous low. And the next low was seen on 8 July – this time, the gap was 81 days. You see where I’m going.
The average time gap is 85.3 days: so starting on 8 July, this suggests we could be seeing the next significant low on or around 2 October, ie last Friday. If the next movement mirrors the 92 days movement in the middle of the three previous dips, we are looking at a significant low coming in the next week or so, possibly this Thursday – 8 October.
The other interesting thing about the pattern is the similarity between the timings of the major highs. From the high on 20 February to the high on 2 June, there were exactly 102 days. From 2 June to 16 September, there were exactly 107 days. We should therefore be looking for a new high for gold on or around 30 December. Of course, analysis like this is not enough, so let’s look at a few other signals and what they might be telling us. Recent price action had started to take the shape of a possible “head and shoulders” pattern with $994 the neckline and the $1,016-$1,020 region the head. This would have suggested a possible pull back to the $976 region, should the pattern have completed. The rally back to $1,010 this week disrupted that, but we are right back down close to the neckline again at $997.
PENNANT FORMATION
This week’s rally did start to confirm a sloping resistance line. Taken together with the sloping uptrend line going back to mid August, this suggests a “pennant” formation. Taking a trendline from the high of 3 September through the lows of last week, there is also the possibility that a “flag” is forming. So what next?
If the pennant is broken to the down side, by moving back below $996, we could see it first test the 30 day moving average at $988. (In fact, in the afternoon move following the non-farm payrolls, gold did dip and bounced hard off the $988 level, but rejoined the pennant formation, testing the upper limit.) If it continues
in its flag formation we could see it find support from the long term support line going back 12 months, around $976.
This could be around 8 or 9 October, the date predicted by the cyclical pattern above. It should also be around the 50 day moving average – currently around $972 but trending towards $976. This is the level predicted by a possible “head and shoulders” move.
All of this may never come to fruition – a wildly fluctuating dollar, a traditionally troublesome month for markets and any number of other factors could see a completely different outcome. Yet the signals suggest that if you did want to get long gold, a buy order around $976 might be prudent. It might even mean a happy Christmas if the cycles hold.
Ian O’Sullivan is a former trader and now works at Spreadex.