This post is the first in a series capturing my analysis of the gold market situation as I complete chunks of analysis. The planned posts at this point are:
- This current post.
- A post studying situations where gold fell hard at the same time as the stock market falling hard (as happened this week).
- A look at this week's interventionals.
Having been out sick this week and not trading very well I find I'm still leveraged long gold and need to figure out what the probability is of upward price action.
The next three graphs show, for the present gold bull market, those cases where a bull market high is followed by a correction that pierces the 50 day moving average. I've put these corrections under the microscope and to see if they can help me decide what to do about my now deeply out of the money $1800 Dec 2011 call options.
If you are holding or considering buying gold this article may provide some insight one what to expect thru the end of the year.
Minor point: I'm using daily closing prices for all this analysis.
Since the start of the bull run there has been 14 cases (including the current one) of a 50 day moving average breakdown after a bull market high. This current case is already one of the larger ones. I expect I'll be adding columns to this table as my analysis proceeds.

The current correction is already a big one from a percentage standpoint (column C). Still the following data from the table indicates the correction probably still has further to go:
- 7 of 13 of the previous corrections lasted longer than this one has already (column C)
- All four of the corrections most like the current one (rows 3, 9, 10 and 11) went longer than the current prior to finding a bottom.
- 11 of 13 penetrated the 100 day moving average and 6 of 13 penetrated the 200 day moving average while this correction has yet to penetrate the 100 day moving average (with a daily close).
- All four of the corrections most like the current one penetrated the 100 day moving average and 3 or 4 the 200 day.
- The RSI appears to have a bit further to fall prior to the bottom being reached.
The current correction has the situation where it hit a top, bounced around for a month and then had a seemingly vertical drop of around. The table that follows adds columns regarding the first major vertical drop (consecutive down days) for the earlier corrections.
The first thing I notice is that this correction's first big vertical drop (with a jump in the gold/silver ratio) started it started a full 20 days after previous bull run high. I'm not sure what to make of this. It means this correction may be different from earlier corrections.
I also notice that a 3-day duration for a vertical drop is close to average, although one more day would make it average. The size of the vertical drop is close to the largest earlier vertical drops (which I call the most similar to the current correction, rows 3, 9, 10 and 11). This means that this vertical drop is probably ended (or will end Monday). Those most similar corrections last a day longer than the current correction which implies that this correction's vertical drop has a bit further to go.
But the most important thing to notice is that only 3 of 13 corrections hit their lows with the end of the first vertical drop. 4 of 4 vertical drops greater than 7% ended up putting in a lower lower. This means I probably want to trade around this expected further decline if possible. An average further drop of 4.8% moves the price of gold down to 1582 (coincidentally, or not, matching up pretty closely to Jim Sinclair's lowest support number).
Another thing to note is that of the four corrections with vertical drops > 7%, all had bounces at the end of the vertial drop and two of them were substantial (1.4%, 3.4%, 4.0%, .7%). So if the vertical drop has completed, waiting for a bounce to exit makes some sense.
The main hopeful thing I see from this vertical drop data is the RSI reading at the end of the vertical drop. The current correction's RSI has achieved a lower level at the end of the current vertical drop than previous such corrections (rows 3, 9, 10, 11) and is closing in on what could be the ultimate low for this correction.
Now, my options are going to expire around Thankgiving which 9 weeks away. Most of them are now way out of the money. I don't want to hold options in the final week. So, I need a big price recovery in the next 8 weeks to avoid having them "go to zero". So, let's see how the price changed from the end of the vertical drop to 8 weeks afterwards in these prior corrections (column Q).
Yikes that looks bad. Even though there's lots of scary things out there (Europe, Falling Commodities And Stock Prices Signaling Recession, China Slowdown, etc.) the outlook from this table is neutral for the next 8 weeks. Looking at the most similar corrections (rows 3, 9, 10, 11) indicates that we shouldn't really expect an up move over the next 8 weeks.
My options need a big price bounce back if they are not going to expire worthless. Column Q says not to expect that. The overall conclusion of the study so far is that gold seems to be just about due for a bounce, but after that it can be expected to decline further without much improvement from now until Thanksgiving. I don't like that message, but that's what this data indicates.
Lessons to be learned: If I'd been watching and analyzing more closely, I think I would have (probably) dumped my options as soon as $1800 was breached (and definitely after the 50 day crossing). This is a case where my own internal psychology has caused me to hold onto positions after they should have been dumped thereby ramping up my losses. One excuse is that I had a cold all this week. Perhaps one should tighten their stops (or just dump all leveraged positions) when their health isn't 100%. Live and learn.
MontyHigh, www.worldofwallstreet.us Download 20110924gc50downcrosses
It's all about the relative strength of large gold stocks vs "everything else". My point is that right about now, the large gold funds (for example Blackrock World Gold Fund) are outperforming even emerging market funds and are at the top of fund top lists over the last couple of months. This will have the effect that the part of the herd that invest their savings by trend following will pile into gold stocks. I do not use that strategy myself, but many people do. They just look at the best performers last three months and buy them and re-balance their funds every other month.
Look for example at this swedish internet broker:
https://www.avanza.se/aza/fonder/fonder.jsp
The first table are the top 8 performing funds the last three months
The second table is the most bought funds the last three months
BlackRock World Gold is the best performing fund and has just reached place no 8 on most bought funds. And is probably rising on the most bought list.
The herd money are coming!"