Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Fibonacci Analysis of the Metals
01/28/2010 11:00 am EST
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.
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.
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?|pagebreak|
The monthly and weekly OBV did confirm the most recent highs and have been leading prices higher for some time. Before a major top is complete, I would expect to see some significant divergences on the weekly technical studies. Therefore, the current correction should be a buying opportunity. Historically, the correction in gold so far (12%) has not been that severe considering the average of six corrections going back to 2003 was 19%. Looking at the April 2010 gold contract, we can see that the initial decline from the December 3 highs (point a) held above the 50% support level ($1069) from the July lows (point b). The more important 61.8% retracement support is at $1032, which coincides nicely with the major 38.2% retracement support level from the November 2008 lows, which is at $1033. There are also some interesting projection targets that can be derived from the decline from point a to point b. If the decline from point c were to equal 61.8% of the decline from point a to b, then the target would be at $1073, very close to the 50% support at $1069. If the decline from point c is equal to 100% of the decline from point a to b, then the Fibonacci projection target is at $1015. Additional extension targets can be drawn using the rally from point b to c. These are not shown on the chart, but the 127.2% extension target is at $1052 with the 161.8% extension is at $1020.
The most likely scenario, in my opinion, is for the decline to terminate in the converging support zone in the $1032-$1033 area. The second is for gold to test or slightly exceed the late-December lows (possibly $1052) before turning higher. At this point, the least likely scenario is a decline in gold to the major 50% support level at $973. To indicate that the correction is indeed over, we need to see a shift in momentum or a candle formation that is consistent with a turning point. This was the case in late December as the RSI3 formed a double bottom in late December, followed by a bullish pattern (see rectangle). The RSI3 turned lower on January 12 and is still declining, but has not yet reached oversold levels.
The popularity of the Spyder Gold Trust ETF (GLD) continues to grow as it has become a very popular investing and trading vehicle. GLD reached a high of $119.54 on December 3. This just barely exceeded the 100% target using the rally from point a to point b and measuring up from point c. The 161.8% target is at $138.50. So far, GLD is trying to hold the 38.2% support from the lows at point c to the December 2009 highs. The 50% support is at $102.30 with the 61.8% support from the recent rally and the 38.2% support using the rally from the October 2008 lows in the $98-$99 area. The lack (so far) of any heavy volume on the decline recently suggests that GLD may be close to bottoming.
Looking at the hourly chart of GLD, we can identify some additional levels of support. First, using the decline from point a to point b and then measuring down from point c, you get a series of targets. The 61.8% target comes in at $104.90 with the 100% target at $99.50. One can also use the rally from point b to point c with the 100% support at $105.16 and the 127.2% extension at $103, which is very close to the major 50% support at $102.30. The 161.8% extension is at $100. The levels to watch are at $104.90-$105.30 and then in the $102.30-$103 area. To suggest that the lows are in place, we need to see a reversal to the upside and positive momentum.
NEXT: A Timely Look at Silver, Platinum, and Copper|pagebreak|
Silver has also corrected sharply from the December 2009 highs at $19.42, which corresponded to the 261.8% extension target using the correction from point a to point b. The 127.2% and 161.8% extension targets nicely contained the June 2009 highs. The major 38.2% support now lies at $15.20 along with the longer-term uptrend, line 1. The 50% support level lies just below $14.00. The monthly and weekly technical studies are positive, but not nearly as strong as those on gold. The weekly OBV violated its uptrend, line 2, in mid-December and is back below its WMA. It is entering an area of support, but if the WMA were to start declining, I would become more cautious.
March silver rebounded impressively from the late-December lows and stalled just below the 78.6% retracement resistance of the decline from point a to point b. It dropped sharply this week and is already back to the $17.00 area. The 100% projection target using the decline from a to b and measuring down from c is at $16.20, which also corresponds to the 127.2% extension target of the b-to-c rally. The 161.8% extension target and the major 38.2% support measured from the November 2008 lows are both at $15.50. There is an additional area of converging support from $14.20-$14.50 as the major 50% retracement support is at $14.20 with the 261.8% extension target at $14.50. The short-term momentum for silver is still negative, but I would look for a low to form at the support zone in the $15.50-$16 area.
Even though platinum has had a strong rally from the late-2008 lows, it has not yet overcome the major 61.8% resistance at $1725. The rally highs at $1654 were made the week ending January 22, and this was the 100% Fibonacci target projected using the rally from point a to point b and measuring up from point c. The 261.8% extension target is at $2530. There is a band of chart support now in the $1380 to $1510 area with the 38.2% retracement support at $1310. The weekly OBV has confirmed the recent highs and continues to look strong as it is well above its rising 21WMA. The breakout above major resistance, line 1, does appear to be significant. The daily analysis does suggest that a short-term top has been completed, so it may take some time before the intermediate uptrend can resume.
Copper has had a dramatic run from the March lows as it has more than doubled. The 350 level was hit in the past two weeks and our Fibonacci analysis of the daily chart in early September had upside target in the 335-350 area. This also corresponds to weekly chart resistance, and there is further resistance above 400. The weekly uptrend, line a, is at 320 with initial chart and retracement support in the 300 area. The more important 38.2% retracement support is at 270. The weekly OBV broke through its initial downtrend, line c, in April, and then overcame major resistance, line b, in June 2009 (point 1). The OBV did confirm the recent highs, so the current correction should be a buying opportunity.
The next few months should be quite interesting in the metal markets as the correction in gold over the past two months has caused some to question their outlook on the yellow metal. The bullish sentiment on gold has declined from the late-2009 highs, but can still go lower. Technically, I would expect new highs for gold in the first half of the year. Platinum continues to also look strong, while the technical outlook on silver is less positive. On the next major gold rally, the gold mining stocks should be watched closely as they continue to lag.
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