Let's identify the conditions that occurred in 2009 which will lead forward into an assessment of the 2010 outlook for metals and oil.
As we entered 2009, we had a major asset crash due to the events in toxic debt. In response the Fed initiates major bailout programs. In the loosest monetary policy of modern times, interest rates collapse to a low in late 2009. Look at the interest rate collapse into the end of 2008 on the TBT (TBT) chart (20 year Inverse Short Bond ETF) As we can see by the chart, today the long term interest rate picture is in a neutral position entering 2010 above the blue downtrend line but above the blue uptrend line. The technical indicators are warning that this current uptrend is losing steam as RSI has turned down and Williams %R is in the process of dropping out of its overbought area (usually a sell signal). This indicator we use has been a good at assisting us to discern where the highs and lows occurred.
The 50 and 200 day averages are converging right where price is. A break above or below the averages with a subsequent penetration of the trend line would set the next interest rate trend in motion. The direction that rates take will influence many of the other markets. A break higher will portent higher rates and lower bond prices for the USA.
Right around the same time interest rates bottomed last November, the FIRST asset class responds.
Gold bottoms with a November / December spike at the 700 dollar area right when interest rates bottom and takes off on a rally to 1007 in March.
The gold chart displays the massive $540 dollar rally that has transpired over the past 13 months. Not only has gold led all asset classes from the depths of the debt hole, but has been the clear winner of the decade in mounting a rally from $251 dollars to $1227 at the peak. So strong has the rally been that the 200 day moving average was only tested once, during the spring lows of April and May. Even the 50 day moving average went from September to December over 100 days without being revisited until the past few days.
The lows for 2009 were the $865 - $870 area in gold. That pullback low was to exactly the same price as the peak of January 21, 1980 when gold touched $875. From that low in spring, gold rallied away from the 200 day average until it reached a point where price was $250 dollars above the average when it peaked at $1227.
Outlook for Correction
There are three probable places for a price low during this pullback. First is the 50 day moving average at the current price area of $1110. This is one potential price zone where a rally might re-establish itself. Should gold bottom in the 1080-1090 area and solidly move above the 50 day average, gold would stage an assault on the upper trend line where a major channel in which price has bounced off the channel three times over the past 13 months.
The second area is the horizontal channel line drawn off the 2007 and 2008 top. We can see how this area points to the price area where gold broke over 1000 to finally rally into higher triple digit prices. This pullback or test of the breakout area would give us a range of about 1020-1040 in price.
The final area is where the bottom channel line, the small blue downtrend line drawn off the March and June peaks and the 200 day moving average converge in price. That would put the price range at about the 950-990 area and will be the most SOLID PRICE SUPPORT area for gold in which gold would still maintain its upward momentum within this channel. Closes below the 930-950 area during 2010 would suggest that the current credit contraction cycle has the potential to bring down the house one more time like it did in 2008.
We expect gold will bottom at one of these three areas between now and mid January and a rally back up to test or exceed the upper trend channel should develop going into mid winter. Depending on the strength of the next leg up will determine how long the rally is to last. Seasonal charts show that corrections usually develop in the mid-February to early March timeframe on average. We suspect a spring peak will lead to what it usually does, a July/August low. Should gold next rally fail to make new highs and then turn lower under the 50 day average or below the low of this current pullback, the potential to test the lower levels we have listed above will be in play.
Going into 2010, the gold market seems to have had only one nemesis, DEBT DEFAULT. The 2007 high at 1033 occurred right at the beginning of the Lehman default announcement. This most recent pullback began within a week from the Dubai announcement and the announcement itself had a 55 dollar pullback day. It is an area that bears watching. We've seen the debt situation go from public, to institutional, to financial, and now with the most recent rumblings, NATIONAL. USA, UK, Spain, Greece, Iceland, Italy, and the list goes on, but you get the idea. There are those who feel the situation in China is not to be trusted either. The notion that the global economic recovery is not sustainable or at best in serious question is viable as the longer end of the interest rate curve as we saw on the TBT chart has not signaled a new higher trend rate as of yet. Should the recovery falter at a time of massive credit contraction the liquidation of assets both paper and hard cannot be dismissed. Paper will go and depending on the severity of the contraction will depend on how much gold might be affected.
But what does Dr. Copper say?
There are a lot of analysts who look to copper to gauge economic strength. The chart below shows that copper was the next major commodity to bottom when the feds collapsed interest rates. Copper blew away the completion in 2009 by running from $1.25 to $3.25 in a triple digit gain. And look at the chart. It was virtually straight up all year. Most recently however, the price velocity over the past few months suggests of a price that is running out of steam. Copper is virtually unchanged in the past few months.
The price high is also coming at a time price location where the 2008 collapse in price began from. Notice the blue arrow line drawn where a price gap occurred and price never recovered. The fact that price has rallied all the way back to this area and is now showing weakness in its price pattern suggests that Copper also is questioning the viability of this recovery. For certain a correction from this area is the odds favored event. Watch the Williams% R indicator as it is just about to fall out of its overbought range.
From a time and price perspective copper looks ripe for a pullback in early 2010. Should copper drop below the lower blue channel line and below the 280-290 area, odds would favor a pullback to a minimum of the 200 day average at the 260 area with potential to trade lower should the recovery falter in the far east. As long as we remain in the channel copper can climb. Should it break below, odds favor a correction.
Crude Oil Crude double dipped at the bottom by developing a December low and then a subsequent February seasonal low under the 40 dollar area, which if you recall was near the 1991 Iraq invasion high.
Crude oil is nearing the potential seasonal lows as well. Notice that the current nine straight days drop to under $70 had crude oil at the same price as last June and August. This underscores how important it is to understand not only the trend of markets, but the VELOCITY and STRENGTH of the trends. While it can be said that Crude is almost a double this year that is suggestive that you bought at the bottom. More important is that anyone playing crude since last June who is not a very short term trader has been hard pressed to make a buck. However, its seasonal lows are approaching. As long as oil is above the 59-65 area the uptrend should continue. Any moves down that PRICE AREA anytime but especially by the end of February where the seasonal lows are due would be an excellent opportunity to take a position. The two blue arrows drawn on the chart shows the next key resistance area in crude oil. The 90-110 area should provide the most significant resistance to price in 2010. The current price pattern does not look as bullish as the other commodities, but look for a seasonal low in the coming weeks.
From Year to Year......................
From the end of last October to mid February, Gold was the place to be. From mid February to mid June Crude was the place to be. From mid June to mid August, copper was the place to be. And since September, it has been Gold, Gold, Gold.
In light of the above paragraph, there are a few ways investors and traders can take advantage of the seasonal tendencies. One is to be overweight the commodity that is in season and the one showing the best strength on the chart. Another is to simply line your portfolio with a mix of these commodities so that each can have their turn providing a lift to the bottom line of your portfolio. And finally for the seasoned trader, take advantage of gold spring selloffs by having some crude plays with those gold profits you take in the winter WHEN the trend changes.
The markets will not be an easy navigating area in 2010. One of the key elements we need to be on guard for is whether the markets will do the opposite of this market, the US dollar.
There has been a potential trend change in the US dollar and some believe will be the "surprise" trade of 2010. Whether that is a correct forecast or not will depend on many variables.
This is where we come in. Over the course of 2010 we will be forever assessing the trends and looking for great chart set-ups to take opportunity by the hand and to brave the adversity coming.
There is a great wisdom that is known by all the great traders and investors and it is this.
"If you do not take advantage of the 4 or 5 good rallies that occur during the year and ride them, then the rest of the market will eventually nibble your profits and account balances away."
updated Dec 23, 2009
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