MARKET RADAR: Gold Overbought, But Longer-Term Uptrend Remains Intact

Thursday, September 1, 2011

Japanese Stocks Up, Oil Top-Heavy at $95 Resistance Level

By Bill Sarubbi

Vienna - (PanOrient News) Gold is likely to remain in a correction into September 7-8 before the uptrend resumes. From a pattern standpoint, gold has to fall below the August 25th low to 1700. Gold remains very overbought both weekly and monthly. But, longer-term, the uptrend remains intact.

The intermediate-term gold cycle topped on August 5th, but gold went parabolic, topping on the 23rd. (In contrast, the stock cycle topped on the 5th, but the actual top was already in place.) In bull markets such as gold, prices can push past projected cycle highs (right-hand translation). In weaker markets such as the equity market, prices can top early (left-hand translation). The intermediate cycles that I employ are unlikely to catch parabolic moves that occur very infrequently. The last such gold run that is comparable occurred in 1979-1980.

This golden bull has exceeded the 1980 run in time but not in price. If this bull were to match the price gain in the prior bull, the price will have to move over $6000 per ounce. I do not think that this will occur because prior to the 1971-1980 bull, the price of gold was controlled. As Dr. Gary North explained, prices will move in the opposite direction to that which the authorities intend it to move. Thus, the gold price was artificially depressed at the beginning of the last bull market, unlike this market. At the 1980 peak, gold was 150% over its 200-day moving average; it was only about 22% over its M.A. at the August peak. This suggests that the August top is not a major one.


The intermediate DJIA cycle turned down on August 5th, however the market top had already occurred in late July. A market can top earlier than the cycle when the underlying trend is weak. The cycle currently projects a September 9th high. Between now and Friday, the 2nd, the end-of-the-month upward bias will likely hold the market up. After the 2nd, the cycle suggests that the up move will continue into the following Friday, the 9th. The short-term technical indicators support that view, but the longer-term measures suggest that the corrective action that began in the spring and summer has further to go. The market action after the 9th will be vital in the determination of market direction for the rest of the year. Most of the European markets are in the same condition. In the Far East, Thailand and Japan will likely hold up better than most markets.


Oil is in a trading range and is unlikely to exceed $95, a resistance level. There is a downtrend line and a 50% retracement level at 95. On the weekly chart, there is a downtrend line and a broken support line at 95. This former support line is also resistance. The weekly graph shows higher lows in momentum, a bullish indication, but there is much resistance overhead. For guidance, let us turn to the oil cycle. The cycle peaked and turned down on the 31st and bottoms on September 6th. The next projected high is the 28th and the next low is on October 3rd.

Bill Sarubbi, a strategist and portfolio manager currently operates his own business from Europe. He spends most of his time in Vienna, London, Tokyo, and Abu Dhabi.

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