Sunday, December 6, 2009

Gold Correction? Consolidation?

After tagging the all-time high of $1,226/ounce on Thursday last week, gold crashed on Friday on the strength of the U.S. dollar after the November unemployment number was announced. It sold off more than just just the dollar strength. The rumor was that the investors had margin calls and sold gold.

I don't know if they were margin calls on gold trade or the U.S. dollar trade. One possibility is that investors who were short U.S. dollar had to cover and unwound their carry trade (long gold).

A correction was overdue, as many say, as the rise after the October breakout was almost vertical. The candlestick formed an inverted hammer last week, indicating the trend change. The question is, how low will it correct?

This is a 3-year weekly chart of GLD, the ETF that tracks gold price. On Friday, the fall was arrested near 61.8% Fibonacci retracement from the long-term support (and neckline of the reverse head and shoulders) to the Thursday top. Since the rise in the past three weeks was particularly rapid, it could retrace back to 38.2% Fib, around $107, filling the gaps.

Slow stochastic (60,3) is still above 80 on the weekly chart, though it may be breaking below the recent trendline support. AROON's red and green lines are still very much apart, though this is a lagging indicator.

Looking at the previous breakout and correction (blue Fib lines in the chart), the level from which the breakout occurred held in the correction ($68.80). If that were to happen again, then the $100 level should hold.

The general market has been very volatile intraday these days, and the bollinger band on the major indices are contracting on the weekly charts. (Take a look at the latest newsletter about general market from Wait and see seems to be the name of the game for now for both gold and the general market.

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