STRATEGIES

Just a year ago, with gold trading at $895, I discussed the Fibonacci targets for gold, which at the time were at $1130 and $1252. Now that gold has surpassed the $1200 level and corrected fairly sharply, I wanted to review what I see as the key levels to watch in the metals.


Figure 1 - Click to Enlarge

This quarterly chart of Comex gold using the continuous contract goes back to 1974 and shows the dramatic rally from the 1976 lows at point a to the 1980 highs at point b. Several of the levels that have been hit over the past five years can be derived from this rally and the ensuing correction. From the highs at $873, gold declined into the 1985 lows at $281, point c. An impressive multi-year rally then developed, which peaked at the end of 1987 (point d) and retraced 38% of the b-to-c decline. The final corrective lows were made in 1999 at $253. Using the a-to-b rally and projecting upwards from point e, the 61.8% target was at $732, which marked the high in 2006. The 100% projection was at $1025, which was slightly exceeded in 2008 when the high was $1034. The 161.8% projection target is at $1500. One can also calculate extension targets using the decline from point b to point e. The 127.2% extension target was at $1050 with the 161.8% at $1252.


Figure 2 - Click to Enlarge

When we look at the weekly chart, we can derive some additional Fibonacci targets as I have discussed earlier. Using the correction from point a to point b, the 261.8% extension target at $1050, which was just missed in 2008, but overcome in 2009. The 423.6% extension target stands at $1362. Similar analysis of the correction from point c to point d gave us a 127.2% extension target at $1132 and 261.8% at $1262. Upside projections can also be made using the rally from point b to point c and measuring up from the lows at point d. A rally that was equal to that from point b to point c gives the 100% target at $1182, while the 161.8% projection is at $1352.

So, you might ask, with so many targets, which one should you believe? By looking at multiple time frames, you can look for clusters where there are multiple targets. For example, from both the quarterly and weekly charts, there were targets in the $1050 area, which was a nice fit with the 2008 high of $1034. In 2009, we identified targets in the $1130 to $1186 area, which were exceeded in late 2009. From the quarterly and weekly charts, we now have targets at $1252 and $1262 with additional targets at $1352-$1362. If our current correction is not too severe, then the $1352-$1362 area is not an unreasonable target after the prior highs are overcome.

In our last article on gold, released on December 28, 2009, I discussed the technical signs that suggested gold’s correction was over. At the time, I concluded, “Though the recent lows could still be tested or slightly broken over the short term, the recent action indicates a tradable low is now being formed.” February gold closed on December 28 at $1107 and declined to a low of $1086 two days later before turning higher. The rebound has taken April gold up to a high of $1163, falling just short of the 61.8% retracement resistance at $1169. The heavy selling during the week of January 18 has taken gold back towards the recent lows, so what’s next?