Today we are getting the backtest to the bottom rail on the diamond bar chart at 475. This is a very critical test taking place right now.

Below is the line chart of the H&S top formation. With the line chart the backtest can go as high as 485 or so. This is one of those critical points, when trading the markets, that one has to decided if this is the beginning of something or a stopping off point to lower prices. If you believe this is the beginning of a new bull move then you buy your favorite stocks or hold what you have. If you believe this is just a backtest to the breakout area then you either lighten up on your stock positions, go to cash or go short. There are many options right here and now to consider.

Another surprise to the downside. They will all take their turn when the time comes. This doesn’t happen in a bullish environment.

GOLD 7 point bearish rising wedge breakout.

Gold and silver have been in corrections since they both had exceptional rally phases that topped out last year. Gold topped out with a double top, one high in August and the other high in September. Silver topped out much earlier as it’s rally phase started earlier than gold’s. Silver topped out in April of last year and the correction is now getting close to one year in the making. Both corrections are taking on the shape of a falling flag or downtrend channel with silver’s further along in it’s development. As you know I have turned cautious over the last several weeks as these consolidation patterns are still not suggesting that they are close to being completed. Just the opposites it true. Lets start with Gold as it has been forming a smaller consolidation pattern inside the bigger downtrend channel.

On the top left hand corner of the 8 month daily chart below you can see the double top that halted gold’s rally off the 2008 crash low. Once the double top gave way it only took 3 days to find the first bottom at the 1530 area. That first low is the beginning of our most recent consolidation pattern that is shaping up as a rectangle. Over the next 6 weeks or so gold found it’s first high at the 1800 area where it then went on to form a H&S top that signaled the next leg down would begin. That H&S top measured down to the 1526 area that was real close to the first leg down off the double top. That low at 1526 marked the 3rd reversal point in what now looks like a rectangle pattern. The next rally phase took prices up to the original high at 1800 where again gold ran out of steam as an unbalanced double top formed. Gold broke off that unbalanced double top with the flash crash signaling the top was in. As you can see we are presently trading below the double top hump making lower highs and lower lows.

The next chart shows a year and a half of trading that will give you a longer perspective so you can see how the possible rectangle fits into the bigger picture. We closed Friday right on the thin dashed blue rail that is the halfway point in the rectangle at 1660. This center rail usually acts as support or resistance depending on which way the price is moving. The rectangle will not be completed until we reach the bottom blue rail at 1530 or so at which point one of two things will occur. The first scenario is that the rectangle will be a consolidation pattern and gold will decline further down to the 1400 area as measured by the blue arrows. This is the preferred scenario.  The second thing that could happen is that gold bounces off the bottom rail of the rectangle around the 1530 area and rallies back up leaving a fifth reversal point signaling the rectangle could then be a reversal pattern to the upside. At this point its still alittle too early to say which scenario will play out but looking at the longer term chart and the 6 month time cycle chart may give us some clues as to which pattern will eventually prevail.

Next lets look at a weekly chart that shows the 6 month time cycle with  Fibonacci retracements. Before we go to the 6 month time cycles we need to look at the 65 week moving average that has been one of the best moving averages for finding the bottoms in gold. After gold hit the 65 wma on the second leg off the double top, support was found  which led to the rally back up to 1800 top blue rail of the rectangle. As you can see by looking back to just after the 2008 crash low the 65 week ma was never violated. That was also the case before the 2008 crash so this is a critically important moving average to keep a close eye. Now onto the 6 month time cycle that has been most accurate since the 2008 low calling every low except the very first one on the breakout of the 6 point expanding falling wedge which was inverted. As you can see the next cycle low is due in late June which is only 3 months away so there is still plenty of time for gold to chop around before putting in the next important bottom. I’ve added 2 Fibonacci retracements, one at 38% which comes in at 1449 and the 50% retrace that comes in at 1302 or so. When viewing  this chart below notice the blue 6 point expanding falling wedge at the bottom left side of the chart that was the big correction of the first major advance of the bull market. Notice all the small red consolidation patterns that formed during the next major impulse leg up that ended with the top at 1920. Now to put our current blue consolidation pattern into perspective, think of all the action between the two big blue consolidation patterns as a major impulse leg, with the two bigger blue consolidation patterns as bookends. We are currently just correcting that big 3 year rally that came to an end at 1920 beginning of our current consolidation pattern.

Just one more long term chart of the bull market for gold that goes all the way back to it’s beginning in 2001. The takeaway from this chart is the very nice clean uptrend channel and the bigger patterns that have formed at roughly the halfway point in each leg up. The top rail of the major uptrend channel has 3 major touches while the bottom rail only has one so far. Using the 6 month time cycle on the chart above I added a possible price objective for time and price that comes in around the 1325 area sometime in late June or July where the bottom rail of the major uptrend channel comes into play. Note the RSI at the top of the chart that has a topping pattern in place and also the MACD that has now crossed to the downside. The blue histogram is also below the zero line signaling weakness.

What these charts say to me is that gold is in a correction after rallying for almost 3 years off the 2008 crash low. This correction we currently find ourselves in is pretty normal when looking at the long term chart above. What is so painful is that the precious metals stocks have not participated in gold’s rally which makes this otherwise normal correction seem very extreme in nature and skews our emotions. July has produced some very good bottoms for the precious metals stocks in the past. This year July may very well provide the precious metals complex with a most excellent bottom to pick up some bargains that will surely materialize if these charts play out close to expectation.

In this report I want to focus on just some simple but effect indicators such as moving averages and Fibonacci retracements. The first chart shows some daily moving averages that have come into play at some point in the bull market. The 150 dma has been one of the best short term moving averages for identifying bottoms and the 300 dma has been very good for the longer term. Then of course you have your 50 and 200 daily moving averages that come into play from time to time like right now for example. Gold is currently being supported by the 50 and 200 dma with the 300 dma support coming in at 1593. I would like to see gold start trading above the 150 dma which has been very good support in the pasts.

The 10 month ema has done an outstanding job of holding support for most of the bull market. During the 2008 crash low the 10 month ema closed below the price action for about 3 months where it quickly recovered and held support until our most recent consolidation pattern. During our recent correction the 10 month ema close below the price action only one month where it again recovered quickly. The current 10 month ema comes in at 1624 which is just below the low made so far in March.

The last moving average I would like to show and is probably my favorite is the 65 week ma. As you can see on the chart below the only time it has failed was during the 2008 crash. In every other instance the 65 week ma has held support. Even our latest correction held support at the 65 week ma.

The next gold chart I would like to show is the Fibonacci retrace of our latest correction. After hitting the bottom in late 2011 gold went on a nice run higher up to 1792 where we got the flash crash almost 2 weeks ago. So far the fib 50% retrace has held support.

The last chart I would like to show is a very long term chart that goes all the way back to the 1980 bull market high in gold. This long term chart of gold is probably my favorite as it has been playing out for many years now. Its also a good study in support and resistance. What this chart shows is how each level, cup and handle, has doubled in size, blue and red arrows. If you start with the first cup, at the bottom of the chart, and add that measurement to cup #2 you have a double. Then if you take the distance of both cups 1 and 2  together, and add them to the top of the 2nd cup you  again get a double with a  price objective to the top of cup 3. Our last move to 1900 was a double of the preceding 3 cups. There is also a nice H&S base that started in 1980 and finally broke the neckline and cup #3 in August of 2007. From that point the bull market doubled again to our recent high at 1920. This chart has now done everything it was designed to do so I don’t know if there is any more to expect from it. I just doubled the whole bull market from the bottom in 2001 to our most recent high, just for the heck of it, which gave me a price objective to over 14,000. I really don’t think gold will go that high so I’ll just keep it on file for future reference.

This Afternoon I would like to show you the very long term chart of the US Dollar that goes all the way back to 1986 where it topped out at 160. As you can see on the chart below it has been in a confirmed downtrend that is still on going. What I want to focus on is the blue downtrend channel that began in 2000 at 120. The top and bottom blue rails are perfectly parallel with each rail having two hits on them. Now I want to focus your attention on the red horizontal pattern. At this point the only thing I can name it is a 2 1/2 double top. I’ve seen this pattern on other stocks that can show up at a bottom also. Whenever I see a horizontal trading range like this, similar to a rectangle, I always put in a center line in the middle of the consolidation pattern. This is the thin red dashed horizontal line. You can see how this center rail has halted the advance in the dollar since 2011 with the last touch about 2 1/2 months ago at the 82 level. The dollar is currently trading just under 80 so we are nearing the strong resistance points where the top blue rail of the center downtrend channel and the red dashed horizontal rails converge, green circle. The red 2 1/2 top halfway pattern has a measured move down to 52 sometime in 2015 which is only 3 short years away. A subscriber asked me the other day what will it take to finally get the precious metals stocks into rally mode. This long term chart of the dollar is your answer. We are within one or two points of reaching the strong resistance point at 82. As the dollar is looking for a high right in here I think the precious metals stocks are looking for a low right now which makes perfect sense. Jim Sinclair used this chart several years ago in one of his commentaries on the US Dollar. As this is a long term monthly chart its still the same chart with only the red halfway pattern developing within the blue downtrend channel that is new. One last note on the dollar chart. There was a bullish rising wedge that formed as a halfway pattern back in the late 1990?s that measured to the last major top in 2000.

all the best Rambus

Goro is bucking the trend today and is getting ready to breakout of a bullish falling wedge. The neckline held support yesterday which is what we like to see. I would like to see a nice pick up in volume when GORO breaks the top red rail of the bullish falling wedge. These stronger stocks will lead the rest higher when the time is right.

The XAU is showing our uptrend channel is still intact and there is a strong possibility that we are forming a triangle consolidation pattern. We have 3 confirmed reversal points so far in the development of this triangle with the 4th and most important reversal point just about finished. You can see where the top blue rail of the triangle and the bottom black rail of the uptrend rail intersect at 192. I would view this triangle as a halfway pattern to the upside. The blue arrows is how I would measure the price objective. We may have another day or two to complete the red triangle and start the next leg up. Remember consolidation patterns are a fight between the bulls and the bears until one side wins out. The odds favor an upside breakout as the XAU has been in an uptrend since the first of the year. I know it doesn’t seem like it but that’s what has been happening. Two steps forward and one step back.

GPL broke the top rail of it’s downtrend channel earlier this week and is now backtesting the potential breakout. Sir iluvpms ask about a price objective for GPL as he own shares of this stock. There are 2 ways I measure for a price objective. The first way is what I call the breakout to breakout method. To use this method you have to have 2 completed consolidation patterns. First you measure from the breakout of the lower consolidation pattern, in this case, and measure all the way up to the first reversal point in the next consolidation pattern just above, red arrow. You then take that measurement and add it to the breakout of the upper consolidation pattern to get your price objective. The chart of GPL below shows this first method, breakout to breakout, green circles on chart.

You can see this method has a price objective to about 10.92 or so. The other method I use is to measure the impulse leg in the lower consolidation pattern to the first reversal point in the consolidation pattern just above, blue arrows.Take that measurement and add it to the last reversal point in the bull flag to get your price objective at 13.85. By putting both the measuring methods together it gives a zone, brown area at the top of the chart, in which to look for the move to exhaust itself.

By putting these two measuring techniques together we have a price target of 10.92 on the low side and 13.85 on the high side. I hope this answers your question on how high this potential move may carry once the impulse leg gets underway. All the best iluvpms…..Rambus

GORO had another backtest to the top blue rail of the 6 point bullish expanding falling wedge. This is a low risk buy point right in here.