Technical Analysis – Put Egos Aside & Respect the Charts

I would like to repeat the idea that it is best to subordinate yourself to markets at all times.  To put your ego aside or at least check it daily to make sure it is not leading you astray.  The gold bug ego for example, hardened by a solid decade-plus of relentless bull market is in my opinion too set in its ways on balance.  That is because it is an ego that knows it is right.

Au monthly chart, log scale

Using a log scale chart, which is better for illustrating trend lines, we see that gold is at critical lateral support zone.  But there are two more lateral support zones roughly in line with the two major bull market trend lines.

It is difficult to imagine gold declining very hard from current levels, given the superior sentiment backdrop (pervasively over bearish by the usual contrary indicators), but the chart is always the chart and it should be respected by right minded people.  Gold holds critical support at 1524 until it doesn’t, see?

HUI weekly chart, linear scale

Speaking of respect for charts, the sad journey of the HUI Gold Bugs index drives home the point.  There were no predictions made in Biiwii land.  There have only been probabilities based on status above support, below resistance, etc.  In fact, I must once again own the fact that in 2010 into 2011 I had a measured target of 888.  Nice one chart boy!

But the important thing is to keep respecting the charts no matter what they do, regardless of whether what they are doing is constructive to your favored plan or bias at any given time.  HUI, in making a series of warnings (1, 2 & 3 on the chart) by violating support levels, has come to a very bearish state.

With the constructive sentiment backdrop and extreme over sold status, the index has been a candidate to at least put in a tradeable counter-trend bounce.  But yesterday something happened that even put that prospect in jeopardy.

Since this area of the market is one that I remain engaged with fundamentally – the Cyprus hype only adds fuel to the bullish case for gold – my newsletter Notes From the Rabbit Hole will remain open to the bullish case at the drop of a hat.  But we will surely not become victims if worst case scenarios come about in the interim.

That weekly chart of HUI especially, has most recently been a negative view since the index lost former support at 460 after making a ‘W’ bottom last summer.  That means that Huey must now prove that it is not bearish (by recovering at least the lower of the 2 red dotted necklines) and not the other way around.

Some people dislike technical analysis because it can say some disturbing things that go against everything we think we know.  And that is exactly why we need it.  The current plan is to be ready for opportunity whenever it arrives on its own schedule.