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GOLD & METALS

Timing the Next Gold (XAU) Upleg

06/14/02 09:37:47 AM
by Gary Grosschadl

It's time to take another look at the XAU gold index.

Security:   $XAU
Position:   N/A

In my previous article "Triple Top and Bottom Formations in Gold and the US Dollar" (04/11/02), I closed with these comments: "The XAU has to fight through a congestion zone at the 75 area. Meanwhile there is possible support from USD's minor trendline at 116 and then major support likely at 108. Watch for success or failure at these crucial points in this and shorter time frames as a guide going forward."

Now two months later, where do we stand? First of all both the XAU and the USD did behave as those charts indicated -- a continuing move off a respective triple top of USD as the XAU continued its upside move beyond the trendline break. The XAU did battle successfully past the 75 congestion zone to reach the 89 level. Meanwhile, the USD fell convincingly below the minor trendline support level of 116 and now sits at 111 but has yet to test the major trendline support of 108. This may yet occur during the next XAU upleg.


For this current analysis I will use a daily chart. The XAU looks to be going through an Elliot wave type of cycle. Typically this involves a five-wave movement with three uplegs and two corrective downlegs, where wave 3 is the longest and strongest. If this interpretation is correct then it is very near the bottom of wave 4 and will soon go into a final wave 5 upleg before heading back down again.

Graphic provided by: stockcharts.com.
 
Using two chart indicators you can see a previous pattern and can make reasonable bullish assumptions going forward. First, looking at the CCI (commodity channel index which identifies changes and strength in trend), deeply oversold conditions are indicated. This acts as a heads up to the start of the next upleg. Bullish waves 1 and 3 responded and likely wave 5 will soon follow suit.

To time the actual buy point, we can use the MACD (moving average convergence/divergence). When the moving averages cross over from under the zero line, this is the bullish cue for the aggressive trader. Then look for further bullish confirmation by noting the movement of the black MACD line going above the zero line. Also the observant trader should expect to see the XAU rise above the 50-day EMA as additional confirmation.

The downside risk would be a failure of either the MACD to rise above the zero line, or a reversal of the black MACD line once it rises above the zero line and make a bearish move below that same line. In other words, give the move the necessary stop-loss room to accommodate these MACD parameters.

To summarize, the CCI is signalling a buying opportunity approaching, and now we should wait for the MACD crossover to initiate the buy signal. Aggressive traders may choose to move on that signal whereas more prudent traders may decide to wait for the previously mentioned confirmations. Gold moves can be volatile and are prone to sudden reversals so traders must have a healthy respect for risk.


Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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Comments

Date: 06/15/02Rank: 5Comment: 
Date: 06/17/02Rank: 5Comment: 
Date: 06/19/02Rank: 5Comment: 
Date: 06/20/02Rank: 5Comment: Gary...great chart..but fundamentalist question...does it seem contrary that Gold and the Dow should look ready to move up at the same time? What charting software are you using..What do you think of Advanced GET? keep up the great work, Steve Brophy NYC sbrophy@nyc.rr.com
Date: 07/07/02Rank: 5Comment: Very good analysis
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