Gold and Crude Oil

I’m still working out a few kinks in the new site, this weekend I’ve experienced a little issue with links.  Due to this issue I wasn’t able to write the weekend reading post this week.  Instead, I wanted to spend a few minutes tonight looking at weekly charts of both gold and crude oil.

The fact that gold has put in an inverse head and shoulders pattern over the past year and a half is undebatable.  The range from the March 08′ high of 1029 to the October 08′ low of 692 is $337.  This pattern though is not complete until the neckline at 1029 has been broken to the upside.  The measured move out of this pattern would bring us to 1366, how long that takes is anyone’s guess.  Here are a few things over the next three months or so.  If and when gold is able to break past 1029, watch the volume on both the $GLD and $GC_F closely.  Large volume on the breakout will be key in confirming the fulfillment of this pattern.  I will expect to see $1100 quickly as momentum players pile on.  Look for gains by short term players to be booked at that point, leading to a retest of the neckline at $1030.  This test will be very important as it will determine whether the breakout level will now show significant long term support.  Long term players will watch closely here for support, if it holds I can see them piling in big time.  If support doesn’t hold, things could get ugly for gold quickly.  From failed moves come fast moves, this is true on all time frames.

Let’s put on our macro thinking caps for a second.  Gold isn’t going to $1300 in a vacuum, this move will either be in reaction to the movement of other assets or in conjunction with them.  The US Dollar Index currently sits at 77, six and a half points from its most recent bottom of 70.5 back in March of 2008.  Could the US Dollar retest this level, sure.  I can see a major break in the dollar as being the catalyst for the expected surge in gold.  I can also see the dollar and gold move up at the same time in the event of the “fear trade” being put back on.  We saw this between January and March of 2009 when the second round of deleveraging took place in the market, slaughtering equities and commodities alike.  Investors unwound carry trades in the US Dollar sending it surging, and bought gold as a last ditch end of the world safety play.  This was an extraordinary moment in the market’s history where both the dollar and gold rallied simultaneously in the face of what many believed was a deflationary spiral.  Could this happen again?  Although odds would not favor a repeat of the “fear trade” being put back on, we must keep out minds open to all possibilities.

Crude oil also sits at a very focal point between 65 and 75 dollars.  Crude is running into major resistance here as it tests the highs put in during the summer of 2006.  This level also happens to be the 38.2% fib retracement off  the 2008 highs.  The air above 75 in crude is clean to the 85 level where it runs into resistance to 100.  Above there and there is nothing technically stopping crude from making another run at 145.

The more likely scenario I see is a long consolidation period where crude trades between 50 and 75.  I believe the fundamental players are willing to sell crude up around 75 given the underlying weakness in the global economy.  This will change long term as China’s thirst for crude expands regardless of global economic health pushing crude back towards 145 and above.

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