Crucial Test Approaching

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The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a breather.

The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a breather. That breather would be in the form of a short-term pullback into the mid-cycle low.

The initial move out of the July intermediate-cycle low lasted 22 days before forming a short-term top.



The current rally is now on day 21 and very short term overbought (see chart above). Traders should now start looking for a brief pause in this market. A move back down to the $1,120 support zone is probably in the cards some time soon.

I'm also starting to see divergences in breadth and signs that institutional traders are stepping aside for the moment. More on that for subscribers in Tuesday's market update to subscribers.

If we are on the Brink of an Asset Explosion, as I think we are, then traders should be prepared to position long in virtually any asset class as we make our way down into this temporary correction.

I expect the stock market will also exert some influence on the precious metals market when it sinks into the low. As a matter of fact, at 21 days it now appears gold has already begun the trip down into its next daily-cycle low.



As this short-term gold cycle is right translated (topped later than 12 or more days) the expectation is for this move to hold above the last cycle low at $1,044. It would be a big plus if gold can hold above the last short-term dip at $1,087 and keep the pattern of higher short-term highs and higher short-term lows intact.

If it can, then I would be looking for gold to move above the critical $1,161 level during the next short-term cycle.

If gold can take out $1,161 then the pattern of lower intermediate lows and lower intermediate highs will be broken. That will also force a re-phasing of the last intermediate-cycle low from December to February. Again, more on that in the subscriber newsletter.

Suffice it to say that it is critical this rephrasing take place if gold is going to continue higher and not go through another multi-month consolidation phase like it did from March '08 to Sept. '09.

So, short term, expect some weakness in the stock market which will probably continue to rub off on the gold market, but be prepared to buy the dip as this bull rally in the stock and gold markets is not over yet.

Toby Conner
Gold Scents
A financial blog with an emphasis on the gold bull market

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