The Futures / Inter Market Report

Trading the World’s Markets                            

July 6, 2007

                                            
Matthew Caruso, CMT                                  
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An outlook on Gold

            Gold prices have been correcting since the month of April and are still below their high of 2006. There are a number of technical signals displaying oversold readings in gold. Also, there is an important intermarket signal coming from the Swiss franc that is pointing to the potential for higher gold prices. 

            Last week’s report looked at the strong bull markets that most commodities have been in for several years now, and gold is one of them. Although prices have climbed for the most part in the past several years, there are the occasional corrections as currently being experiences in gold. Several technical indicators are now showing that the correction is over or nearing its end. 

            The stochastic oscillator is an often used tool to study the momentum in a security, figure 1 shows a weekly chart of gold with the stochastic oscillator in the bottom panel. As you can clearly see when the red oscillator turns up and crosses above the dotted signal line near the oversold 20-30 level, prices typically climb higher. The same is true when the oscillator turns down from the 70-80 overbought area however it is a better idea to take only buy signals in uptrends, not sell signals. All stochastic buy signals since 2003 have yielded very timely and accurate entry signals for gold. This week we are receiving a new buy signal from this indicator and it should not be ignored.  

Figure 1 Gold weekly – chart by Metastock

            Another indicator that is displaying the probability of a bottom in gold is the gold commercial index, an indicator we’ve looked at in previous weeks.  As seen in Figure 2, the green commercial index is now at 73.99 indicating large accumulation by commercial traders. Two recent areas of accumulation are highlighted with green arrows and show the ability for this indicator to help find market bottoms. We now have a positive shift in price momentum and accumulation by the smart money. Another important element to watch is the signals coming from other markets. 

Figure 2 Gold Weekly - chart by Genesisft.com 

            The Swiss franc is known to be one of the world’s most stable economies and to be hedge to inflation much like gold.  Therefore it is no surprise that both gold and the Swiss franc have a strong tendency to top and bottom together. This is highlighted by red and green arrows in figure 3. In the June 8^th report we looked at the franc approaching a major up trendline and the probability of prices climbing from that support (http://tradesystemguru.com/content/view/57/58/). Figure 3 shows the same trendline in the Franc and also a strong support uptrend line for gold. It is no surprise that both these markets are finding support at the same time. A closer look at a daily chart in Figure 4 shows how the franc found support and climbed much higher off the trendline. With strength in the Swiss franc, gold is likely to climb as well. Both gold and the franc are also experiencing positive momentum divergences as shown in figure 4. Prices recently declined as shown by the red line under the prices, while the MACD indicator for both assets has been climbing. This is a bullish set up and is another confirmation that both of these markets have bottomed or are near a bottom. There are 2 examples of bearish divergences in the MACD that occurred in the past year and the tops are highlighted with the pink arrows.

Figure 3 Gold weekly – chart by Metastock

            In summary, gold has a number of signals pointing to an end of its correction. Price momentum has turned up in both the weekly and daily charts, as well Commercial traders are now heavily accumulating the yellow metal. Positive market action by the Swiss Franc and the support for prices in both markets all point to the probability that Gold will once again begin climbing.

Figure 4 Gold daily – chart by Metastock

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