The Futures / Inter Market Report

Trading the World’s Markets                            

May 9, 2008

                                            
Matthew Caruso, CMT                                  
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Gold in bullish consolidation -- Update 1

            Back in March as Bear Sterns rocked the financial world, the one shining star was gold which spiked to over $1000 to $1033.90. Unfortunately for anyone who bought at those levels gold then traded back at $904 only 3 days later! How quickly good luck fades in this business and all the more reason why we must not depend on luck, but tested and true trading techniques to alleviate us from the emotional aspect of trading. Depending on the leverage employed, a 3 day fall like that can easily wipe out a trader if he is not adamant on using protective stops. 

            After a much needed correction, it appears that gold is setting up for another move to the upside. I know it seems rather bleak right now with most people being bearish on the yellow metal, but if you’ve been reading these weekly articles you’ll know just how bullish that pessimism actually is. Let’s take a look at our first chart in figure 1. As you can see, my sentiment proxy is very bearish this week. Prices have been falling and that invariably leads most people to believe that prices will continue to fall. If you look at the chart which extends back to late 2002 it would be important to note that the long term trend is still firmly up and so I so no reason at this juncture to believe that prices will continue a sustained move lower. Not only are advisors bearish but so are small speculators. We first looked at this tool last week when studying soybean oil. When the majority of small speculators are selling it is typically a low in the market. It stands to reason since this group of investors are least knowledgeable and informed. So when we strip away all the media hype we have an oversold market in a long-term up trend which is very bullish.

Figure 1 chart by genesisft.com 

            When taking a closer look at a daily chart I find more reasons for optimism.  If  you look to figure 2 you will see that I outlined a contracting channel that prices have been correcting in. After the initial fast 3 day drop, gold has corrected only a modest $50 more and over more than a 1 month period. It was by no way a jump for the exits by large investors. If you notice, prices have corrected about 50% of the prior up leg which is the norm for most bull markets. The short term (pink) trendline was penetrated this week and a break above the upper blue channel would likely mark the end of the correction and a resumption of the up trend. I believe there is a greater risk in being short at these levels rather than long.

Figure 2 chart by genesisft.com      

Update 1 – Soybean oil

            Soon after breaking above the channel presented last week, prices exploded to the upside closing at the high of the week.

Figure 3 chart by genesisft.com

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