Stock prices and Commodities prices move in waves. It takes but a glance of the eye upon any price chart to see that this is so. Furthermore, the waves are predictable, which in turn means that prices are predictable, too – not necessarily to the dollar or penny, but oftentimes close enough for formulating investing and trading plans.
This predictability derives from the use of Japanese Candlestick price display plus the use of some of the many standard Indicators which have been prevalent in recent decades. In combination, they very often correctly forecast the course of prices in future days.
Today, that uncanny ability to predict price action was displayed once again, in the patterns of Gold.
We had been saying for many weeks in our Newsletter that Gold was headed for a High and a price reversal. Of course, this flew in the face of general wisdom, which almost universally held that poor state of the economy and the persistent decline in stock prices could have no result other than a continuing increase in the price of Gold. We thought we knew better than that, and awaited the evidence to prove us correct.
The first hard clue that a reversal was imminent occurred on February 20, when the "real body" (that part of the daily price action which is encompassed between the opening price and the closing price) was completely wrapped around the "real body" of price action of the previous day. At the top end of a long trend, when this pattern appears it is called a "Last Bullish Engulfing" pattern, and it is considered to be bearish. On the next trading day (February 23), prices closed lower, and the Candlestick pattern of price action on that day was both a "High-Wave Doji" (a Doji occurs when the opening price and the closing price are the same, or near so) and a "Hanging Man." Both of them have bearish connotations. The Hanging Man requires confirmation by a lower closing price on the next trading day. With these two signals in mind, we were alert for a lower close on February 24.
Prices on February 24 gapped lower on opening and did in fact close significantly lower on that day, thereby providing the necessary confirmation of bearishness. Today, February 25, prices closed still lower (by about $ 20), which has all but surely confirmed that Gold has toppled and roled over, and that prices are very likely to decline from this point.
The Indicators, too, had a hand in the prediction. For several weeks, some of them have been riding along the numerical extremes of their relative ranges; and in one case there has been a sufficient evident divergence between its trend line and the trend line of Gold's prices, in that the Indicator's trend line has been pointing Down while Gold's price trend line has been pointing up. We have learned that a divergence such as that is a warning that a continuation of higher prices is very suspect.
The bottom line is that the combination of Japanese Candlestick price charting and a close reading and understanding of the Indicators cave us good reason to believe that gold prices are heading lower; and the proof began to be apparent today.
February 25, 2009