In June, we observed that the cyclical downtrend in gold was declining at an unsustainable rate following the trading range breakdown in April. During the final week of June, our analysis indicated that prices had returned to a level at which the development of a potentially violent oversold reaction was likely. After forming a short-term cycle low (STCL) during the final session of June, an intermediate-term cycle low (ITCL) followedduring the second week of July, suggesting that a sustainable rebound was in progress. Today, gold closed sharply higher, reconfirming the uptrend from late June and breaking well above resistance at the upper boundary of the power downtrend from April. Since bottoming, gold has gained 13 percent during the course of three weeks.
Our Gold Currency Index (NYSE:GCI), which tracks the intrinsic value of gold as an international currency, has also reacted sharply off of its comparable low in June. The slight positive divergence that developed between the GCI and gold in US dollar terms earlier this month has favored the continuation of the rebound during the last two weeks.
With respect to short-term cycle analysis, the strong advance today reconfirms the current bullish translation and favors additional short-term strength.
From an intermediate-term perspective, the rebound has moved above resistance at the upper boundary of the power downtrend from April as it approaches congestion resistance in the 1,350 area. A weekly close above the congestion zone near 1,350 would cause momentum to experience a bullish crossover, which would support the advance further.
The Gold Miners Index is experiencing a comparable oversold reaction and its weekly chart is already on the verge of a bullish momentum crossover. A weekly close at current levels or higher on Friday would confirm the bullish crossover and favor additional intermediate-term strength.
From a big picture perspective, the question is whether this confirmed intermediate-term low will also prove to be a long-term low that marks the termination of the cyclical downtrend that began in 2011. It is too soon to know the answer to that question with a useful degree of statistical certainty, but gold market behavior during the last three weeks suggests that the development of a cyclical bottom is definitely a possibility. It is always important to remember that a long-term bottom is a process, not an event. The next technical objectives that would further the bullish case would be daily and weekly closes above strong congestion resistance in the 1,350 area, so it will be imperative to monitor price behavior closely during the next several sessions.
Disclosure: I am long SGOL.