Setting up a gold bull market

Long time ago I have written an article on the structure and dynamics of the gold bull market as I see it through the glasses of the SKI indices. The proper setup has a few stages:

1. Proper index alignment: 16-20 bellow, 35-39 in the middle and 92-96 on top. To achieve this order the price has to go down for an extended period of time, usually a couple of months.
2. Forming a bottom. The bottom is signalled with a failed 16-20 sell signal.
3. The third stage is a confirmation of the long term bottom. It is manifested as a rally that has the structure of an impulsive initial wave up. A proper confirmation rally will buy the 92-96 echo because without this buy the true bull is not possible. I want to keep it simple so I will not go into technicalities of this requirement.
4. The next stage is a breakout. It is made of a quick 92-96 sell and a rebuy. This event is a proof of strength of the impulsive wave and the measure of its quality is the absence of a 35-39 sell.
5. After the successful breakout the price moves up while the 92-96 is dropping hence they are forming a ‘scary’ picture where it seems like the price is lacking a firm support. This picture represents the scepticism that should be predominant sentiment throughout the whole move until the bull is widely recognised.

Let’s now analyse some charts while having this description in mind.

Aussie gold shares index

So far this chart is satisfying the criteria to setup a bull market. It had had a 21 month long correction that has put indexes in the right order (stage 1). Along the way it had numerous failed true 16-20 buy signals until eventually the one at the bottom succeeded. The sell signal that ensued failed as it should (stage 2). This signal was followed by a 35-39 buy executed yesterday. This pattern signalled a bottom but we need the price to rise to the 92-96 index/echo and buy it to confirm the bottom and to confirm the impulsive nature of this initial rally. Quite a long way to go compared to other gold indices like HUI but the Aussies were hit the hardest and they have to work the most for the proper recovery. If the 92-96 is going to be bought on this move up, I think it will be around $5500 and in a form of an inverted head and shoulders pattern. That will reconcile very well with the traditional TA support/resistance lines as it can be seen in the picture.

All of my holdings are in Aussie stocks and I am very happy since they are in profit between 20% and 40%. For most of them there is another 10-20% rise before they will be able to confirm the bottom.

HUI SKI

The HUI is similar to Aussie gold stocks except the bottom happened in May and the initial rally was stopped at the 35-39 buy signal. It then had to sustain a drop to a higher low to be able to rearrange the indexes in the right order and then buy the 35-39 again and reach the 92-96 echo. We need that extra push now to buy the 92-96 to be able to setup a true bull market. The resistance exists between $443 and $460 and will be interesting to watch how the price is going to behave while interacting with this range. An immediate push up over $460 and stay over it for 3 days will buy the 92-96 and almost warranty attack on $480-490 before a serious correction.

GLD SKI

While the stocks are leading the rally up the GLD is resting in a sideways correction. Needles to say this is traditionally the right way to start a sustainable gold rally. The price is hovering above the short term indices and approaching the moment of decision. The 92-96 is already set properly for the bull market, we just need the 92-96 signal. By mid-September the time will be up and I expect the volatility to increase dramatically after that.

SLV SKI

The same as GLD except it seems like it has already overcome the resistance from the May 2011 high and is about to move quickly to $30 to test the 92-96 resistance. Check how it, since the 28^th June low, has been almost glued to that long term support line. While doing it, it was also working the short term indices so we have the failed 16-20 buy signal and now the 35-39 buy executed yesterday. I think this should accelerate now to challenge the 92-96 echo soon.

S&P 500

Ok, here is the problem. What to make out of this chart??? I have analysed it in previous updates to come to the conclusion that it doesn’t look good. It has generated three failed true bull signals on the way up which normally indicates a rollover top. Surprisingly it has managed to move even higher and reach the top of the previous medium term rally and is about to give the fourth true bull signal. The problem with this is that this time it happens that the 92-96 echo has the right structure to allow for this signal to survive because it will be in a sharp fall for about two months. The 16-20 and 35-39 will act as a support and there is a chance that we will see higher prices from here. If tonight S&P generates a 92-96 true buy signal it will happen exactly on the 96th day after the April high. These kinds of coincidences always mean something important. Is it possible that we see some kind of a melt up in the S&P price while gold is setting up a true bull and then they disconnect and gold goes up while S&P goes down? I am thinking of this possibility just because I cannot really see gold setting up a proper bull if the S&P crashes and burns right here. To remind you the UUP (dollar) is on a true bull but it is not performing well. Maybe the scenario is this: S&P melts up and buys for a true bull, gold sets up a true bull while the dollar is testing its own. Then, when everyone gives up on the S&P crash (which is predominant sentiment today), we finally see it burning while gold and dollar stay on their bull signals and move up in tandem.

It has been ten years I have been trading gold and gold stocks and this is probably the most interesting setup I have seen so far.

I am 50% long, sitting on a solid profit and waiting to see if we are going to move higher to test the 92-96 echo. If and when the buy is generated I will reduce the position to 25% and try to go 100% long at the end of the next correction. On the other hand, if the S&P crashes here and now and the gold follows I have my trailing stops in place and will let them take me out of the market.