Tuesday, April 22, 2008

Reverse Head and Shoulders in the Gold Price

Gold Price Close Today : 922.30
Gold Price Close Last Friday: 914.70
Change: 7.60 or 0.8%

Silver Price Close Today : 17.698
Silver Price Close Last Friday: 17.342
Change: 35.6 cents or 2.1%

US Dollar Index Today: 71.36
US Dollar Index Last Friday: 71.65
Change: -0.28 or -0.4%

A reader asked me to explain what I meant by a "reverse head and shoulders." That's a formation with three bottoms, the middle usually deeper than the others. The corrections from those bottoms rise to roughly the same line, called a neckline. The whole formation looks like an upside down "head and shoulders." It's a rather reliable sign that a market has bottomed, just as a right-side-up head & shoulders is a reliable topping formation.

See the point of the left shoulder at $904.70, the point of the head at $876.30, and the bottom of the right shoulder at $907.30. Neckline stretches from $960.30 to $956.20. A new low lower than $904 would contradict my reverse head and shoulders interpretation.

I just don't know what to make of the US DOLLAR INDEX. Sooner or later it ought to rally, just to contradict such a universally negative outlook, but it cannot rise higher than 72.50 and has today broken to a marginal new closing low at 71.32. If it breaks down from here it will fall a long, long ways. It made a similar low four days ago. If these bottoms hold, then that's the dollar building a footing for a rally, but a lower close turns the outlook bleak for the dollar.

Stocks today are only touching back to their breakout point and should rise tomorrow. By the way, after the January low the Dow traced out a "reverse head and shoulders," although it's not very plain. Neckline was around 12,750. Head and Shoulders target equals the distance from neckline to head, added to the neckline, in this case 1,318 + 12,750, or 14,068

Aha, does that mean I am turning friendly to stocks? No more than you would welcome a long term house guest with stinky feet and bad table manners. Stocks will keep on underperforming silver and gold price badly for the next 8-10 years.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

"Buy Silver and Gold Coins at the Best Prices"

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down.