What could possibly cause bullion quotes to fall apart here? Not much that I can see. Or even imagine.  Someone in the Rick’s Picks chat room said yesterday that he was looking for a powerful rally in the dollar, which would of course be a negative for gold and silver. But the only reason he could cite was that the dollar has become pretty oversold. Another chat room regular said more or less the same thing about gold-- that it is about to drop sharply to at least $750 because it has become very overbought. Both statements are true enough, at least on the long-term charts. But that is the hallmark of powerful trends – i.e., that they tend to generate overbought and oversold readings that persist for much longer than we might expect.

(Click on chart to enlarge)

Of course, the terms “overbought” and “oversold” are relative and can be highly subjective. Look at the weekly chart of gold above and you can see that the futures generated an overbought signal in August 2005 that did not correct to fully oversold for 16 months. In comparison, the current upthrust in gold, begun from around $660 last August, has been meandering in the overbought zone without fully correcting since early September, or just five months. This suggests that the current bull cycle is only mildly overbought and that it could keep going until next January before Comex Gold gets as overbought as it was at the $732 peak in May 2006.  The subsequent 25% correction took a while to complete, as you can see, and gold did not surpass the old high until September of the following year. But it was worth the wait; for, once the high was breached, bullion went on a tear, rising almost as steeply as the spike that topped at $732.

Two-Penny Precision

We cannot guarantee that Gold is not about to drop to $750, or even lower, but we are not about to predict so nasty a correction until we see hard evidence on the chart. What kind of evidence? From a Hidden Pivot standpoint, it would require corrective ABCD patterns to begin reaching or even exceeding their ‘D” targets; and, at the same time, rallies that fail to reach their respective ‘D’ targets. So far, though, no such weakness has appeared. Meanwhile, Hidden Pivots aside, yesterday’s decline stopped just two pennies shy of a 0.618 correction of the rally begun from 855.00 on January 22. Pretty routine stuff, really.

If the larger bull cycle begun from 773.00 last November were correct to the same degree, it would imply a pullback to 838.00. Let’s see how oversold the weekly chart looks if and when the futures get there. In the meantime, I’ll give the last word to another chat room regular, Steve H., whose moderate forecast posted near the end of yesterday’s session squares with my own: “The last five days looks like a bullish falling wedge in April gold. 888 is support and 895 is resistance right now I would say. A close above 900 would be bullish tomorrow. A close below 880 would be bearish near-term IMO. Historically gold and silver take a tumble in February, but history doesn't always repeat itself. I still see $1200 gold and $25 silver coming this year.”

Drop on By!

Whatever happens, the Rick’s Picks chat room continues to draw its fair share of bullion experts and chartists, and that has helped to mitigate the fear factor that might otherwise attend gold’s wild price swings of late.  The POG might conceivably find its way down to $750 or lower by way of a correction, but even bulls needn’t be shocked or despairing on the way down if they can see the correction unfolding one tradable leg at a time, as it almost surely would.  

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Forecast Like a Pro

The Hidden Pivot seminar scheduled for February is full, so I’ve added an additional session on March 8-9. If you’d like to attend, click here  for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.

Oz-Hours Class

I will also be offering a class in February that is tailored to the scheduling needs of students from Australia, New Zealand and Singapore. If you live in Sydney, this seminar will take place on February 21-22 (Thursday and Friday), from 3:30 p.m. to 7 p.m. These hours will also work for early risers in Western Europe.  For further details, click here.  You can also register directly by clicking here, then on the “Upcoming” tab.