Gold – First Good Oversold Reading in Months

In methodical uptrends we tend to see pullbacks to the 20 and 50-period moving averages. A

series of minor corrections to the 20-period average are generally followed by a test of the 50-

period average. As of Friday’s low ($1,110) prices have reached the 50-day average.

Once a market moves exponentially higher the inevitable correction can be expected to bounce

off the 50-day average and then make a lower low. An overall decline of 15% or greater is

common in gold when the daily ‘strength of trend’ reading (ADX) peaks over fifty. A weekly

reading over 45 brings about declines of 25% of more. The daily ‘strength of trend’ in gold

recently became excessive (ADX > 50) as seen in 2006, 1999, 1993, 1992, 1986, 1986, 1980,

1979, 1973 and 1972, however the weekly reading was only up to thirty so a 15% decline to

major support at $1,042 is possible, but a 25% decline appears doubtful.

The break into December 11th has generated a rare daily Stage II Capitulation Alert ‘within a

rising trend’. This occurs when our Exhaustion and Summation Indices simultaneously generate

oversold readings while above a rising 233-day moving average. The current capitulation alert is

occurring only six days from the high. This is unusually early in a correction. Gold corrections

tend to last a number of weeks. . . except in the most bullish of circumstances (following the breakouts in 01/74, 07/78, 07/79, 08/86 & 11/05). The ten other Capitulation Alerts in the past

forty years produced interim lows on or within no more than two days of the signal. We’ll look

for a bottom now and a six to ten day consolidation as it holds the 50-day ema and 20-day

Bollinger Band coupled with the US Dollar Index (76.52) testing its declining 20-week

exponential moving average (76.96). If the bounce retraces more than 40% of the decline

from $1,226 it will imply that the ‘bottom is in’ and new all-time highs should be seen in the

first quarter of 2010.

Based upon the multi-year breakout in 2007 and consolidation above $700 through last summer

the most severe pullback we can envision will be to the 20-week simple moving average

($1,047). The comparisons to major breakouts in the past four decades in the copper market at

$1.50, crude oil at $40, the Dow Industrials at $1,000, gold at $250