Fibonacci and the Metal Markets

09/10/2009 1:50 pm EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

The strength in gold prior to the Labor Day weekend was impressive and the positive weekly and daily technical studies suggest further gains are likely. The Fibonacci projections from our January report (See Fibonacci Analysis—January 2009) are still valid, but additional targets can now be derived, and I will now also apply the same analytical techniques to silver, copper, and platinum.


Figure 1 - Click to Enlarge

Towards the latter part of January 2009, gold overcame the 61.8% retracement resistance of the decline from point b to point c, which suggested that the correction in gold was over. This also suggested that the 2008 highs (point b) would be overcome, and though it has not happened yet, it is still the favored scenario as the weekly triangle formation (blue lines) has just been completed and the upside breakout was confirmed by new highs in the OBV. The OBV has been leading prices higher for the past two years. Once above the 2008 highs, the 127.2% target from point b to c comes in at $1130 with the 161.8% target at $1252. One can also use the rally from the 2006 lows, point a, and the 2008 highs, point b, for additional projections. From point c, a rally equal to that from points a to b would take gold to $1170 with the 161.8% target (not shown) at $1467.


Figure 2 - Click to Enlarge

Let's take a closer look at gold using the daily chart of the December gold futures contract. The rally from the November 2007 lows, point f, failed at $1015, just below the July 2007 highs and $45 below the March highs at $1060. Since the February highs, gold has traced out a triangle formation that has just been completed. Using the distance from points f to g, a 61.8% rally from point h would take the December contract to $1063 (in black), while the 100% target is at $1186. The decline from point g to h can also be used to generate retracement upside targets with the 127.2% level at $1057. The 161.8% target from g to h is at $1106. It is also interesting to note that the decline from point i to point j was 61.8% of the decline from point g to point h. The triangle on the daily chart can give you another price projection as if you use the height of the triangle (line 1), and then, projecting up from the breakout point, you get a target at $1163, line 2. Putting this all together, it seems very likely that the old highs and our first target zone at $1053-$1063 will be reached. Then, after a pullback from this area, gold should eventually reach the $1130-$1186 area, with a midpoint at $1158.


Figure 3 - Click to Enlarge

Neither the weekly technical studies nor the Fibonacci projections are nearly as clear on silver as they are on gold. The gold to silver ratio (not shown) has turned lower, suggesting that silver may outperform gold. Though both the weekly and daily technical studies are positive on silver, they are not yet giving strong signals for upside acceleration. The weekly OBV has been above its WMA since early August but has not yet broken out above major resistance. A move in the OBV above the 2008 highs would be much more positive. The major 61.8% resistance of the decline from the 2008 highs (point a) to the 2007 lows (point b) is at 1650 and is just being tested. Once again, using the length of the rally from b to c and projecting up from d, the 100% target is at 1789 with the 161.8% at 2171. Then, based on the correction from point c to d, the 161.8% level (in blue) coincides with the major 61.8% resistance at 1640 (point e), and the 261.8% target is at 1932. Based on the rally from points d to e, the 161.8% projection from point f is at 1971, so the cluster at 1932-1971 seems to be the next major target.

NEXT: Analysis Continues on Copper, Platinum, and Metal Stocks |pagebreak|


Figure 4 - Click to Enlarge

Copper has gotten quite a bit of attention over the past six months as it has doubled since the late-February lows. All the weekly technical studies are positive and have yet to form any divergences, so the intermediate trend is still clearly positive. The weekly chart shows a well-defined trading channel with the upper boundaries tested several times over the past month. Our earlier Fibonacci target at 278 has been overcome with the 61.8% resistance level at 310 and major chart resistance at 350. The OBV moved above its WMA in late March and continues to lead prices higher.


Figure 5 - Click to Enlarge

The daily chart of December copper shows a very nice uptrend from the late-2007 lows with continuation patterns forming in both April and June. The rally from a to b was impressive, and using this to project higher, the 100% target (black) at 285 has been overcome with the 161.8% target at 345. Additional targets were obtained using the decline from b to c as the 161.8% retracement target was hit exactly at point d, and subsequently, the 261.8% target in the 285 area was also reached. The 423.6% target is at 337. The 161.8% upside target (using c to d and measuring up from e) at 307 (in blue) should easily be reached with the 261.8% target just below 365. The daily chart appears to show another continuation pattern, so another push to the upside is expected and a move above the major 61.8% resistance. Combining the Fibonacci targets and chart resistance, the next major upside target should be in the 337-350 area, basis the December contract.


Figure 6 - Click to Enlarge

Platinum has rallied from a low of 752 in late 2008 to a close this past week at 1259, but is still well below the 2008 high of 2308. The weekly studies are positive, but are not acting stronger than prices. The major 38.2% resistance level is at 1350, with the 50% resistance level at 1538 and the 61.8% resistance at 1725. Many long-term metal analysts look at the ratio between the various metals, and you can see that the ratio of platinum to gold is currently at 1.26, which historically is fairly low, though it has bounced from the 1:1 level. This ratio did get to a low of 0.5 in 1982. The ratio is back above its now-rising 34-period WMA, so a rally back to the 1.50 level would not be surprising. Given how positive the technical studies look on gold, platinum may surprise us on the upside and outperform gold.


Figure 7 - Click to Enlarge

The same approach of course can be used on the precious metal stocks. Goldcorp Inc. (GG) is one of the largest gold mining companies, and from the October 2007 lows at $13.84, GG has had a dramatic rally. Using the rally from a to b, the 100% target at $42.90 has been overcome with the 161.8% target at $55. The correction from b to c retraced just over 50% of the prior rally, and using this correction, the 161.8% retracement level was just slightly exceeded at point d. The 261.8% target is at $55, which equals the 100% projection (in blue) using the rally from c to d and then projecting up from point e. There was another sharp correction in June and July (points d to e), but it held the 50% retracement support of the rally from c to d. The 161.8% retracement target from this correction comes in at $46.65 with the 261.8% target just below $56. The recent breakout from the daily continuation pattern (not shown) was confirmed by a nice volume surge as the declining volume trend, line 1, was overcome. The chart formation has upside targets in the $52 area, which is just above the converging targets in the $50 area, though a move to the $55-$56 area cannot be ruled out.

Over the next few months, we should be able to see how these projections work out, but expect the volatility to remain high as many crosscurrents attempt to take many weak longs out of the market. I will look at some of the other commodity markets in our next bi-weekly trading lesson.

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