Gold has been a great disappointment to bulls and we think it will continue to falter in the longer-term. That doesn’t stop rallies in the shorter-term however and we have been able to catch two $200+ bounces on the way down. It may now be time for another. Gold futures have been making daily-scale compressions lately and a break now looks possible. The soon-to-expire delivery month of February has already broken upward today but there are more hurdles to jump in the next month along, which is April. If this too breaks up, follow it by going long:
The longer-term picture remains cloudy. There was a crisp monthly top extension at the highs of 2011 and no similar signal yet that makes us think the drop is over. In fact this looks just like every commodity bubble there has ever been in which the price will fall back all the way to the starting point. There is one longer-term reason to be cautious about being too bearish here though – a monthly-scale bottom extension in a mining share index. This marked the end of the drop into June last year but has not provoked any decent rally – yet. These signals have a shelf-life of about a year and a half however, so rallies are still possible from the perspective of this time frame too:
This idea of a rally in gold fits the idea that stocks will continue to drop and the emerging picture in the commodity index world too. These indices of commodities have been ranging for six months, after a downtrend that started in spring 2011. That downtrend will probably resume eventually but we have been trying to pick what rallies there may be in the meantime. It looks as though there may be another starting as a daily-scale compression in one of those indices has just broken up:
This suggests that other commodities too will rally and soya and cotton seem likely candidates as both have moved above compressions. Soya meal is just moving up from a daily-scale signal and cotton broke up from a weekly-scale version some time ago:
There is some possibility that energy markets may also join in a rally, as they are compressed but there is no sign of a break yet. In fact Brent crude has just moved down below a daily-scale compression, which is a bit bearish, but the WTI contracts are still in the area of their recent compressions, so we are not suggesting selling either crude instrument short - we will wait to see if a 'buy' presents itself instead:
Now that January has come and gone, we can see that the reported monthly-scale compressions in China did not break down. Monthly-scale signals can only be said to have 'broken' if they do so on a closing basis, just like daily or weekly versions, so we cannot yet become very bearish. The weekly-scale picture remains the same however - a break down from compressions followed by a rally back up underneath them. These 'return rallies' are often a good second chance to sell, so if you have a way to do so, sell short. Stops should be above the highs of the first week of the year. Charts:
Other equity markets are following our script by dropping and we see no reason to cover any outstanding shorts (from the 27th December edition). We are watching for bottom extensions and will report the moment we see them. Don't forget that there have been weekly and monthly-scale top extensions in many US and some European indices and so we hope/expect to stay short for some time to come - these signals last for three to four months for weeklies and up to 18 months for monthlies...