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Gold Hiccup Or Reversal?

10/08/10 08:38:48 AM
by Donald W. Pendergast, Jr.

Here's an inside look at the reversal now under way in the gold futures market, through the eyes of a system trader.

Security:   GC, GLD, IAU
Position:   N/A

I've written several articles regarding what I saw as the impending reversal in both the gold and silver markets and in the US Dollar Index as well. October 7's intraday reversal in all three of these inextricably linked markets was significant enough to suggest that this may indeed be the start of a notable (and tradable) corrective move lower to major support levels (resistance levels in the case of the dollar index). Here's a closer look at the intraday reversal in gold, as seen by my Goldbugger futures trading system.

FIGURE 1: GC. A very famous (and successful) trader was once quoted as saying that she used trading systems as indicators. if you're a discretionary trader, this very profitable gold futures trading system may also be indicating that a significant (perhaps major) trend reversal is now under way in the gold futures market.
Graphic provided by: TradeStation.
Similar in concept to the Agent Argent silver futures system discussed earlier this week, Goldbugger strives to latch on to every significant intraday surge in the full-sized COMEX gold futures contract. Each full point on this contract is worth $100, so you can imagine the profits garnered as the system caught the "last train north" prior to Thirsday's reversal. The trade netted $3,060 before commissions and slippage and finally exited the trade only $11 shy of the swing move's high point. Not every trade goes this well, of course, and the system only wins about 40% of the time, but with winners gaining more than three times the amount that losing trades suffer.

Other than the outstanding performance of the system, the real highlights seen on Figure 1 are the various clues that are being offered to discretionary traders. For example, with gold quickly dropping as much as 2.37% after peaking at $1,358.70 (before recovering slightly), and this reversal coming after a solid 10-week upcycle that added a full $201 to the price of this heavy metal, this intraday reversal all but guarantees that there is going to be more bearish follow-through to the downside. One of my more potent cycle indicators has also printed a confirmed daily cycle high for gold (and silver, too), so here's what to watch for over the next few weeks as this likely correction plays out.

The Fibonacci 23.6% support level of the massive July to October upswing is at $1,317.55; if this is a real reversal, expect that support area to quickly cave in, with gold seeking to find surer footing at the Fibonacci 38.2% support at $1,287.04. That price also coincides with a 50% Fib support from the move higher out of the August 24, 2010, cycle low, and should offer the first price zone from which to expect a tradable bounce higher.

If October 7 truly was an enduring cycle high, however, and a resulting bounce higher from $1,288 is very weak, the most likely scenario is that a complex, ABC-type corrective wave will ensue, one that may take as much as six to eight weeks (or longer) to play out. Major support for the gold market resides in the area of $1,240 to $1,250 and then heavy-duty support coming in at about $1,202 to $1,216. Major bull markets like this one in gold don't always end like the one in 1980 did; for all we know, this is just a major shakeout in the market, where the big players try to scare the latecomers out and get them to sell their newly acquired gold into their grabby hands. Then the market eventually powers to new highs, at least in cases where the shakeout crowd is successful.

So if you're not yet using a proven mechanical system, at least be watching for the price action of gold at those aforementioned Fib support levels. All of the big boys will be watching them too, and if you're quick on the draw, you might just be able to play a few short sales into the winning column over the next few weeks. This is going to be one fascinating market to watch, as we will likely either see a spectacular blow-off top or another run to truly breathtaking highs in 2011 and beyond. Don't change the channel!

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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