Will Gold Revert Above $1386 Or Make New Lows In 2017?

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Scot Macdonald

Summary

The intermediate- and long-term indications are for gold to revert back to its mean price, which may mean gold reaching all the way up to $1386 or even $1400.

If gold drops to between $1269 and $1256, I recommend buying gold, since you would be buying at the bottom when gold is at an extreme price below the mean.

The short-term indicators for gold are bearish, which may lead to just such a buying opportunity.

In my weekly report published in Seeking Alpha on November 27, 2017, I indicated that the Variable Changing Price Momentum Indicator (VC PMI) weekly trend momentum was bullish. I argued that with gold closing at $1287, the market had maintained a bullish bias, which would continue as long as the price stayed above $1285, which was the 9-day moving average.

The VC PMI Automated Algorithm

We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets", "The Power of Mean Reversion in Factor-Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages, and momentum indicators.

The science of Vedic Mathematics is used to combine these elements into a comprehensive, accurate, and highly predictive trading system. (For information about the VC PMI and its strengths and weaknesses, please refer to my article “Beware and Prepare, Gold and Silver Have Arrived”).

Mean-reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs.

By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it is between 90% and 95% probable that prices will revert back to the mean by the end of the trading session. I used this system to analyze the gold and silver markets.

Gold Review

A key feature of the VC PMI is that it points out the level where a reversion is likely to occur. In my November 27 report, the VC PMI indicated that a close below $1285 would negate the weekly bullish trend to neutral. Therefore, as the market came down below $1285, the sentiment of the market became neutral. This is the first filter we use to identify the trend momentum or sentiment of the market on a short-term basis.

Courtesy of: ema2tradelivesignals.com

If we look (above) at the weekly price momentum indicator of $1285, coming into this week, the market was bullish because gold closed above $1285 during the week. This suggests that you should exit your long positions and take profits between $1297 and $1306.

In this case, the mean is $1285 coming into last week and, because the market closed above $1285, the extreme targets above the mean were $1297 to $1306. One of the important things about the VC PMI is that it identifies the level of supply and demand for the coming day, week, month and year. If we look at the high last week of $1303, the market completed the first level of reversion to the mean.

Accomplishing the target of $1297, and the market reaching $1300 and reversing below $1297 activated the first target below of $1285. The pivot point or the trailing level is the previous level, which was $1285. When the market came down below $1285, it negated the signal based on the weekly mean, triggering weekly stops and negating the bullish signal to neutral. This indicator gives you the inversion levels to the mean with 90% to 95% accuracy.

Last week, the algorithm met the first target and almost met the second target of $1306. If the market reverts below that target, it activates the targets below at the buy one and buy two levels of demand at $1276 and $1264. The low last week was $1273, once again confirming the accuracy of the VC PMI in identifying the highest probability of where the supply and demand levels will revert back to the mean.

The market reverted back below the mean to the buy one and buy two levels, where the algorithm told us to cover shorts at $1276 to $1264. With the low of $1273 and the market moving back above $1276, the market activated a weekly buy signal for gold for the coming week.

Short-Term Bearish Sentiment?

Courtesy of: ema2tradelivesignals.com

The first filter we use is the VC PMI weekly trend momentum indicator, which is the 9-day moving average. The market closed at $1282 on Friday, below the 9-day moving average of $1286. Therefore, the trend momentum is bearish in the short term.

The algorithm also identifies the reversal point. If the market closes above $1286, it will negate the weekly bearish sentiment. This is the first pivot point we use to indicate the sentiment of the market. It can be used initially as a regular stop, if you are looking for a protective level, either up or down.

$1286 is the average price momentum for next week and matches the 9-day moving average. The market closed at $1282, which also indicates a bearish sentiment. If the market reverts back above $1286 this week, the weekly price momentum will be negated from bearish to neutral. Once we know that level, we can identify the extremes above and below the mean.

I recommend covering your short positions if we get a correction down to $1269 to $1256 or if gold closes above $1286, which will negate the average price momentum. This would indicate that demand is higher than the $1269 level identified as the buy one level. The buy two level is $1256. If the market falls to those levels, I recommend buying and going long or exiting short positions and taking profits off the table.

If demand is able to push the price of gold above $1286 on a close, it would activate the supply levels of $1299 and $1316. If you are long, the sell one level is $1299 and the sell two level is $1316, which are pivot points where you should start taking profits off the table on the long side. The higher the market goes above the mean, the more likely the market is to reverse course. By closing above the second level above the mean, the algorithm is indicating a potential shift of the trend and a new higher price fractal is possible.

Fundamentals Continue To Favor Gold

The fundamental factors that I outlined in my October 23 report continue to apply. Negative interest rates continue to support gold, gold bull markets tend to outperform gold bullion, and with gold mining companies having cut costs, the gold market is set for a long-term rise in price. Gold is also "escaping the December curse" and with gold pulling back slightly as the tax plan progresses, I recommend you seize the opportunity to buy gold now during what will probably be a brief pullback before it rises significantly.

Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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