Beginning in late October, the price of gold began to consolidate within the price range of $700 to $775 per ounce which in turn began to strengthen the market indicators thereby providing the possibility of a breakout to higher levels at some distant point in time.  Last Friday, the price of gold did break higher out of the consolidation range which caused three indicators to give positive confirmation - the 8 ema crossed above the 21 ema, the RSI (10) increased in value above 50, and the MACD (8,21,5) continued to advance higher and eventually broke through the zero line on Monday of this week.  On Tuesday, the price of gold continued to rally higher and set a higher high and a higher low than the previous day thereby giving additional confirmation that the bottom for this correction may very well have already taken place - at least from a short term perspective.

 Unfortunately, the low set on Tuesday for the price of gold was higher than the 8 ema which I have discovered over the years to be a sign that the current advance was likely to result either in a minor retracement or a consolidation at the higher level.  In any case, the probability that the momentum would slow was greater than the probability that the advance would continue at the current pace.  Typically, the daily low will track the 8 ema both higher and lower, and when their is a gap between the two, either the price will fall and the low will meet the 8 ema or the price will move sideways until such time that the 8 ema rises higher to meet the low.

Tuesday was a day of consolidation whereby the price of gold traded within a smaller range - there was a slighty higher high and higher low as a result.  The 3 indicators though did continue to advance higher which was a positive sign.  On Tuesday the daily low was still higher than the 8 ema and therefore the risk of further consolidation or a minor short term retracement of the most recent advance was still highly probable.

On Wednesday, the price of gold failed to reach a higher high (negative) but was able to close out the day with a higher low (positive).  The price did close down on the day which was a negative and also the MACD histogram closed lower in value which also had to be considered as a negative event for the day.

Looking at the daily chart one can immediately see that the daily price low was still higher than the 8 ema which when combined with the daily price action on Wednesday, the probability of short term weakness increased.  Therefore, it appears that for now the price of gold will likely trade lower until such time that the daily low meets up with the 8 ema which would be normal market evolution.

What is important to watch here is the movement of the MACD indicator.  If it acts as it typically does off of a bottom, there will be a crossover as the price of gold declines toward the 8 ema.  Should the price then find support, and this low on the MACD is greater than the prior low (which is highly likely to be the case), then when the MACD again crosses over to the upside, taking a long position will have limited risk.  The time it takes to do this may be a week or two, but we will all know by then if indeed this cyclical low / retracement has been valid, and a new trend toward higher price levels is now in place.  My personal view is that we are at the very beginning of the next major leg higher in the commodity sectors although I remain cautious of the potential for manipulation.

PS - Based on the ratio chart of physicals vs shares, the preference at this stage is toward the mining stocks.  In other words, the probability is that the mining stocks will outperform the physical on a percentage bases in the short term in addition to having a lower degree of risk to the downside.  This would appear as logical for the reasons that they were far oversold relative to physicals, and also that historically the mining stocks typically advance higher in value first.  It is still very early to say with absolute certainty that this is the case, but as for now, this is what the charts are indicating. 

NIA

Steve