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Fibonacci, Stochastics and Gold

10/15/01 09:12:21 AM
by Austin Passamonte

Since the September 11th global events, gold investors who believe the precious metal is due a day in the sun, once again have been vocal.

Security:   XAU
Position:   N/A

Many proponents of gold investing continue to forecast near-future spot metal prices far above what it fetches today.

But forget about fundamental guesses based on economic and global concerns... what do the charts suggest might happen?

Figure 1: Daily Chart for the Gold & Silver Sector Index [XAU]
Graphic provided by:
Graphic provided by: QCharts.
Daily charts of the XAU Philadelphia Gold & Silver Index show the market in a general uptrend since the first week of July. A slight pop in price action failed right at the resistance it met near mid-June levels and hasn't challenged the upside since.

Support has been found on the 25% Fibonacci retracement of recent highs to lows, and stochastic values are poised for a possible bullish reversal out of oversold extreme. Is that enough basis to load up on stocks in this sector?

Figure 2: Weekly chart for the Gold & Silver Sector Index [XAU]

Not really. Expanding our view to the broader weekly chart picture shows some disconcerting things for potential bullish plays. The uptrend intact since October 2000 lows is coiling into a wedge while stochastic action declines, a sign of inherent weakness. Secondly, the broad pattern could be a bearish head & shoulders pattern, which forms a classic "diamond" consolidation. Not the most bullish of scenarios for buy & hold investors to say the least.

Figure 3: Weekly chart of Gold

The underlying metal shows its front-month (December) futures contract consolidating in a wedge formation after forming a gap generated from the early September catalyst. Is this a bullish breakaway gap or bearish island reversal? Stochastic values suggest the next extended move will be downward from an overbought extreme while prudent traders can monitor a break in the neutral wedge still in development.

Keep in mind that equity indexes usually (but not always) lead the underlying commodity as stock prices anticipate corporate outlook, which is usually predicated on the future underlying behavior. With this knowledge in mind, gold may return to its former glory in the days ahead but odds are it will happen from a better bullish entry point than at this time.

Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Address: PO Box 633
Naples, NY 14512
E-mail address:

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