Side-Stepping the Drop

By: David Nichols | Tue, Oct 28, 2008
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Back on October 9th, as gold was spiking up to $920, I urgently told subscribers to the daily Fractal Gold Report to close out all long positions in gold, effective immediately. It was clear that the "panic trade" was running out of energy, which would leave gold in an extremely dangerous spot.

Gold collapsed from there, dropping well over $200 in only 11 trading days. And during this period equity and credit markets around the world remained in turmoil, so even though we always gravitate towards the easy answer, there is just no simple explanation for what is driving the trading in gold.

But it has become apparent that the "panic rally" in gold was one of the biggest fake-outs ever.

This was not actually the start of a new hyper-growth phase for gold's bull market, even though it looked so convincing at the time. Often the strongest and sharpest moves in a market are opposite to the main trend, as the suppressed counter-energy releases in a spectacular rush.

This very fast rally was just a hard test back up to the last major breakdown level on the weekly pattern, right around $920. The big clue in real-time was gold's inability to stay above this $920 area, especially with global markets melting down and the VIX and VXO pushing up towards 100. Gold should have been soaring well above $920 during the worst moments of the crisis, but it wasn't.

That's why it was imperative to get out when we still had the chance up around $920, side-stepping the decline that quickly followed.

Even though it's been a massive correction, it's nothing particularly worrisome or out-of-the-ordinary on the big monthly pattern. Markets invariably come back to test the last major breakout level during consolidation periods -- in the process pushing the fractal dimension back up to 55, as it is now on the monthly chart -- as such corrections create the right energy mix for another big trending phase.

In gold's case, the next trend should again come to the upside. There are some very specific buy triggers we're looking for -- which I will continue to update and discuss every day in the Fractal Gold Report -- and we're also watching the dollar index closely, as the rally in the dollar has been one of the main negative drags on gold.

The weekly chart of the dollar index shows a highly persistent up trend that is finally now running out of available energy. Once the weekly fractal dimension hits the high 20s it becomes very hard for a market to continue with that trend, and a consolidation period takes over.

On this weekly chart the trends and consolidation periods typically last 2 or 3 months, so this is going to have a major effect on gold going into the end of the year. A typical consolidation period for the dollar index would take it back down to either $80, or perhaps even $77 if some additional negative energy is added to the mix along the way.

So it's all lining up for a strong rebound in gold over the next few months, now that the last scary leg down of this correction has played out. But we have to keep in mind that aftershocks and re-tests of the lows are common following such a dramatic drop. The plan is to stay patient but vigilant over the next week or so, waiting for just the right opportunity to re-enter with a sizeable long position.

Please follow this link for more information on the Fractal Gold Report as well as the Fractal Silver Report, which is available to subscribers on the annual plan.



David Nichols

Author: David Nichols

David Nichols
Fractal Gold Report

David Nichols

David Nichols publishes the Fractal Gold Report, a daily report covering the gold market using proprietary techniques that go beyond technical and fundamental analysis. The Fractal Gold Report is available by subscription here. Fractal Gold Report Disclosure.

David Nichols is a graduate of Yale University and a leader in the emerging field of fractal market analysis. This pioneering analytical approach studies the markets as chaotic, non-linear systems, addressing the predictability in financial markets. Fractal market analysis discovers the order hidden within the seemingly random chaos of the markets.

David is the editor of the Fractal Market Report and the Fractal Gold Report, daily subscription newsletters written in an easy-to-understand style that cover the markets using his proprietary techniques that go beyond technical and fundamental analysis.

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