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Gold Correction Gains Momentum

|Includes: GDX, SPDR Gold Trust ETF (GLD), SGOL

Gold closed sharply lower again today, confirming the break below congestion support in the $1,750 area and reconfirming the downtrend from August. Technical indicators are extremely bearish overall on the daily chart, strongly favoring a continuation of the decline.

Given the extreme nature of the recent rally from early July to late August, we had expected the advance to be followed by a violent overbought correction and the retracement is proceeding exactly as anticipated. The intermediate-term cycle high signal that was generated last week indicated that the cycle from early July has moved into its corrective phase, so it is likely that prices will continue to correct or consolidate until the next Intermediate-Term Cycle Low (ITCL) forms in late October or November.

Support at the lower boundary of the long-term uptrend is currently near $1,560 on the weekly chart, so the cyclical bull market from 2008 remains healthy for the moment. As long as prices do not break meaningfully below that level, the uptrend will remain intact.

However, the sharp decline in September suggests that the latest Annual Cycle High (NYSE:ACH) may have formed in August, so it will be important to monitor market behavior after the formation of the next Annual Cycle Low (NYSE:ACL) for a potential annual cycle translation change from right to left.

Long-Term Cycle Highs (LTCHs) in the gold market usually occur during the fourth or fifth annual cycle following the formation of a Long-Term Cycle Low (LTCL). We are seven months into the fourth annual cycle following the LTCL in 2008, so a meaningful correction will likely develop in either late 2011 or early 2012.

If the next ACL is followed by a shift to left translation, it will become likely that the latest LTCH is in place. Therefore, it will be important to monitor gold market behavior closely during the next several months. We will identify the key developments as they occur in our daily commentary available to subscribers.

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Disclosure: I am long SGOL.