Gold set up for another rally?

I can hardly believe it, but gold has failed to follow through on the decline from December’s $1228 high, despite the extreme and persistent bullishness leading up to that parabolic top. It’s held tight to $1100 and formed a contracting triangle, while DSI bullishness has dropped to the mid-teens. This is very similar to the set-up in sugar last fall before it blasted off from 0.22 to 0.30 and put in its final high (it trades now around 0.17):

Here’s gold, also in a weekly chart:


What’s interesting about this juncture is that stocks are extremely overbought on the kinds of readings that typically mark at least an intermediate-term top (put:call, sentiment surveys, waning momentum, etc). Since the dollar broke higher last December while stocks were unphased, we’ve seen somewhat of a breakdown of the old correlations (dollar and yen vs. everything else).

If the PM complex does levitate as stocks decline, it would resemble the action in early 2008. After panic and the deflation trade gathered some steam, the metals eventually succumbed. Here is the GDX mining stock ETF in blue vs. the S&P 500 in red:

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4 thoughts on “Gold set up for another rally?

  1. Since I’m too cheap to pay for the DSI data, any chance you could throw me a bone and discuss the rough pattern of DSI for Gold over the past few months (just now became low, been low for a long time, etc.)? Another blog mentioned that the 10 day moving average of Gold DSI was below the fall 2008 panic lows as recently as a few weeks ago. This sounds crazy to me, but if it is so then it is so.

  2. Trending higher from summer through late Nov, peaking over 95%, then down into early Feb (bottoming under 15), rebound to 50 by early March, then down to 20-ish lately.

  3. Mike, do you use EWT for gold forecasting? At this juncture, the larger counts seem to be problematic both for the bearish and the bullish case. This is Kenny’s count:

    He has it as an expanded flat. The problem is [B] length is over 2x [A] length… that kind of make the count not very plausible. Over 1.38 [A] for an expanded flat should already put a question mark in the count. A new high in gold will make the count lose even more credibility.

    However, the bullish count is no less problematic. If we count the move up since the 681 bottom as an impulse (5-wave structure), it doesn’t look good either. The waves are too overlapping.

    So, in these kinds of circumstances, do you put EWT on hold and employ other methods of TA?

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