I did some analytics on the gold bull market and the sell-off this week.
Since the bull market began in 2001, there have been four occasions when gold has moved 18% to 23% above the 150-day moving average line which were then followed by severe corrections. The periods of the significant moves higher were
Oct 05-May 06
Sept 07-Mar 08
Aug 09-Dec 09
July 11-Aug 11.
On three of the four occasions, gold bounced off the 150 DMA, consolidated, then broke to new highs. (The other time, it bounced off the 150 DMA then moved higher without consolidating.) The returns from the break-out to the blow-off top were as follows.
05/06 – 49%
07/08 – 48%
2009 – 25%
2011 – 21%
Interestingly, the return was lower for this latest ramp but the time was compressed compared to the other three occasions.
Inevitably, the market corrected. On all three prior occasions, the market pulled back to the 150 DMA. The corrections preceding a significant bounce were as follows
May-June/06 (1 month) – 26%
March 2007 (1 week) – 12%
December 2009 – 12%
Thus far, gold has corrected 11%. A 12% correction from the top would put gold at $1670-$1680.
In each case, after the sharp declines, there was a bounce. Returns during the bounces were as follows
June-July 06 – 25%
March 08 – 5%
January 10 – 8%
In 2008 and 2010, the market ultimately went lower after the initial bounce. In 2006, after the bounce, the price approached the low but did not break it. The declines after the initial bounces were as follows
July-October 2006 – 17%
March-May 2008 – 11%
January-February 2010 – 11%
On the Fibonacci levels, the retracements from the highs were as follows
05/06 – Sold off hard then bounced right at the 76% retracement level.
07/08 – Initially bounced at the 38% level then went through the 50% level but did not hit the 62% level.
2009 – Sold off hard then bounced at the 62%. Eventually approached but did not hit the 76% level.
Where are we today?
This morning, gold bounced right at the 62% level at $1704. The 76% level is at $1662.
The only time when gold broke through the 76% retracement level was during the Financial Crisis, when it briefly retraced all the gains from the 07/08 ramp in October then, it rose nearly 50% and approached new highs a few months later.
Using the Fibonacci levels, we can retrace the bounces from the low to the previous highs. These are the returns from peak to trough, and the retracement levels from the intermediate term low to the previous high.
2006 – 26% decline, just below a 76% retracement (about 70%)
2008 – 18% decline, 76% retracement
2010 – 15% decline, 123% retracement
Thus, if we are mapping out a trading strategy going forward, it would look something like this.
The 62% retracement level is $1704, which was hit this morning. A 76% retracement level is at $1660. $1660 is a 13% decline from the top, which approximates the 12% decline of the last two peaks. So a fairly good low is $1660-$1680. We can approximate a near-term bottom of $1660-$1700.
A bounce of 5%-8% would not be unexpected. A 5% bounce of the lows this morning – the 62% retracement level – puts us at $1790. An 8% bounce of $1660 also puts us at $1790. This morning, after hitting $1704, gold rallied 4% to $1770. That may be enough to put in a near-term top before it heads lower. We will see.
An 11% decline from $1790 then puts us at $1595, which would represent a 16.5% decline from the $1913 top on August 23. This is smack-dab in the middle of the 15% and 18% declines of the past two occasions. We would then expect the price to rise to at least the $1820-$1840 level as losses are retraced. Then we will see from there.
So if the past is prologue, this is what we would expect to see.
• A bounce to $1790
• A decline to $1595
• A bounce back to $1820-$1840
• A pullback and consolidation, then an assault on the old highs.
Price targets are approximate. I blew out of my silver trading position this afternoon as gold approached $1770. A 4% bounce from the lows is good enough for me. I closed out my trading position earning 0.002% over the past two weeks, certainly not worth eating the tremendous volatility where within six trading sessions, silver rose 9%, fell 12.5%, then bounced 4%. I retain a small core position in silver.
Of course, this framework is merely a guide. One should not trade by this. The market can and will do anything. Markets will do anything they want. The past doesn’t repeat itself precisely. If it did, this job would be easy, not extraordinarily difficult as it is sometimes.
