Back on Dec. 29 — after gold had plunged from $1,797 per ounce to $1,547 — I made a prediction that things actually would get much worse before they got better. In fact, I predicted gold would ultimately fall to $1,442 per ounce before it was all said and done. Gold promptly rallied 10% through the end of February, never once even falling under that Dec. 29 low. I’m enjoying my crow.
Click to Enlarge Yet, the 7.8% pullback since the end of February might end up vindicating me. The current price of $1,644 still is nowhere near my initial downside target, but the pullback hasn’t been halted yet, either. Indeed, we’re seeing a big bearish clue now that we weren’t seeing back in late December.
Back on the Wrong Side of the Trend
For the first time since that December plunge, gold futures are back under the 200-day moving average line (green). You might recall it was a pretty big deal then, as it was the first time gold had been under its key 200-day line since December 2008. To see it happen then was a sure sign of impending doom … only it wasn’t. Gold was back above that long-term average line by mid-January, and the bearish red flag abruptly stopped waving.
It’s kind of funny how those seemingly little things can come back to haunt you.
We just made our second move under the 200-day average line, and did so without making a significantly higher high. It begs the question — did we ever actually dig our way out of the December hole?
The answer might come soon enough, though it has little to do with the 200-day moving average line itself. Rather, it has to do with a major support line (orange) extending all the way back to mid-2009. It was that support line that staved off a big chunk of the pullback brewing in December, and it’s that support line that could be tested as early as today. If it fails to act as a floor (and it will take a couple of days to know for sure), then I’m renewing my prediction of a move to $1,442. If it does hold up as a floor, I think we can count on another round of at least mild bullishness.
Just for the record, though, my money’s on a breakdown under the support line, currently at $1,598. And I’ve got a very specific reason for my pessimism.
Sellers Coming Out of the Woodwork
Pullbacks happen. But if there’s not a lot of participation behind them, they usually peter out. That’s what happened in December. Although gold was tumbling, the volume of gold futures contracts actually was shrinking, signaling that it wasn’t an earnest selloff even though the media was all over it.
This time, the media seems to be less impressed by gold’s dip, yet there are an alarming and growing number of sellers piling on. As you can see on the above chart of (continuous) gold futures, the volume is starting to swell again on prices’ way down.
It is what it is, and what it is isn’t all that encouraging. The fact that the recent pullback isn’t getting much attention is what makes it so scary; if there was nothing to it, the talking heads probably would plaster the story everywhere they could.
And as for where my $1,442 target came from, it wasn’t randomly pulled out of a hat. That’s where the first key Fibonacci 38.2% retracement line is waiting.
I know those time and distance projections seem a little convoluted to some, and I can’t say I don’t understand your doubt — I’m a skeptic too. Yet, I’ve found Fib lines to be key levels more often than not, so I’m willing apply them here in the absence of any other major floor.
Either way, the storm’s brewing again, and I don’t think we are prepared to fight it off this time. The floor at $1,598 is the key.