Channel Psychology – GOLD

Just like always, our brain can comprehend a Psychology Channel (Tube), but inverting it to understand Channel psychology might need Bono’s lateral thinking. Even if you are an investor, a trader or analyst, prices leave an imprint on our mind. As just like historical price highs are remembered, our brain also creates imprint of inclining, declining or inverting prices. Unknowingly even the most ardent tape reader is channeling in his mind. However, there is a limitation. The tape reader can study a few stocks, but not the big picture. Despite a keen understanding of stock prices some tape readers destroyed their fortunes. Like Jesse Livermore did. There is another reason why mental channeling can kill. The exercise is so involving that following rules might take a back seat. Even, Jesse was also known not to follow his rules strictly. Or was he barely left with time to do it? Great traders also go wrong and so rules remain the real gurus. This is reason something as basic as channel psychology with rules can work. Simpler the system, better it should work.
We have kept you on track with Gold from the May 06 top and even illustrated you to the up scenario from 575 supports back to 660. And if this was not enough, all our last few Gold reports have been taking about, “above 640 we look at 690”. We did hit our anticipated target again. But what happens from here is indeed a tricky call. The normal channel (above) has witnessed a third breach at 20 year resistance line. The more a channel psychological resistance is tested, the more likely it is to break. The rule is simple. If 690-700 breaks, channel supports should push prices to the next level at 800. But 690-700 does not seem an easy level, which prices can just break through.
First Gold historically has always moved in upmoves of an average five years, starting 1970-75, then 1976-80, 1985-88, 1993-96 and now 2000-2007. This makes the current upmove the largest in the history of Gold prices. This can be interpreted in two ways. One that we are starting a new bull market in Gold, which could leave aside breaking 1000, make the magical figure look miniscule in days to come. And second this is just another extremity, which will come to an end, as markets stabilize and the Golden Hedge loses its charm, as the crisis commodity. We belong to the first school of thought. And though we think Gold is at a short term extreme, but prices have a bullish signature to them. We are in a multi decade bull market in Gold, with a 30 year cycle. The cycle started in 2000 and should continue till 2030. Bullish markets have an extended upmove cycle and a short negative cycle. With 7 years running we have atleast 7 years more statistically for Gold to register the high of the decade. And if we add the bullish extension, we can easily see Gold headed up till about 2020.
But before our eyes start glittering, let’s understand that forecast is one thing and making money on it something else. Mastering emotion and conviction of research or belief is not easy to come. Let’s take a step at a time. Some negative reasons, First, we have a Key Reversal monthly bar at the May 06 high for Gold. Key Reversal bars signal exhaustion. Second, the move down from the top has barely finished 8 months, which keeps the character of prices of an intermediate degree. Since the start of the bull move we have not had a more than 9 month fall, which is needed to correct such a large upmove. If Gold continues to move up without a sizeable correcting in time or price, it’s prone to a price shock, which makes it tougher to handle for traders and investors alike. Third 690-700 marks a key Fibonacci confluence level. So even if don’t get a multi week move down from here, a short term dip here can not be ruled out. Fourth, Momentum on weekly basis continues to diverge from prices. And if this was all not enough, we have the host of other Gold related Indices and stocks, which are also not confirming Gold’s intentions to move up from current levels.
So as a rule we will still give the potent bar a chance before we pull off the lid from our 1000 target on Gold. We have put up the long term count on Gold, which seems to be completing the 1 primary wave up. The sharp 2 primary wave shock down should also fall at one of the channel psychological supports (illustrated), where we will be positive again. Now after our 690 target is met, we want to be a bit cautious. And as we said a host of other Gold Indices viz. MCX (India Spot), HUI (Gold Bugs), NEM (Newmont Mining Corp), GFI (Gold Fields Limited) and XAU (Gold and Silver Index) are not confirming Gold’s intentions. We have been negative on MCX all this months. And our anticipated key level at 9300 has not breached since Aug 06. So much noise, but prices continue to be sideways in the channel.
In conclusion, there was Jesse who might be constructing channels and then there is John Bollinger who went a step ahead and visualized rolling channels. His psychological bands are also saying something about Gold. For us above 690 Gold, 9600 MCX (India Spot), 360 HUI (Gold Bugs), 48 NEM (Newmont Mining Corp), 19 GFI (Gold Fields Limited) and 150 XAU (Gold and Silver Index), Gold is headed to first a new high and then 800. But till then, we sit tight and wait for it to turn.