Inside The Aden Forecast

About our charts:

The prices of any of the markets we cover are usually based on weekly Friday prices. We like weekly charts because they provide a better reflection of the important market trends by eliminating the daily static.

Most of our charts are plotted on a semi-log, or ratio, scale. A semi-log scale reflects percentage increases rather than absolute increases. For example, the distance between 2 and 4, a 100% increase, is the same as the distance between 4 and 8. Using this scale allows us to compare rises and declines in all of the markets in percentage terms.

The market prices are used together with our other indicators and most of the indicators are used in conjunction with one another. The primary indicators we use are:

• Moving Averages: These are used to smooth out the price movements for better trend visibility. Short, medium and long-term moving averages are identified and are sometimes used in combination with one another.

  Longer-term moving averages are often used as confirmation signals of major trend reversals. Moving averages are used with the price and other indicators.

• Leading Indicators: These are our favorites and they are based on the rate at which a moving average is changing in percentage terms. Changes are often seen in the leading indicators before they are apparent in the price, so they assist in anticipating price movements.

The leading indicators help to illustrate when a market is oversold and, therefore, a good buy, or overbought and due for a downward correction or decline. They also help determine when a market has room to rise or decline further because it’s not yet overbought or oversold. Overbought and oversold areas are established based on historical high and low levels. We use short, medium and long-term leading indicators.

The long-term leading indicators generally lead major price movements and they have produced the best results in identifying major trend reversals. When a long-term leading indicator is positive or above the zero line, it coincides with a major bull market. When it is negative and below the zero line, it coincides with a major bear market.

The medium-term leading indicators are helpful in determining when a market is due for an intermediate rise or a downward correction within its major trend.

Overextension: Measures the distance between the price and a trend in percentage terms, identifying when the price is overextended.

Relative strength: Determines which of two markets is either the strongest or the weakest.

Differential: The difference between two numbers. Differentials are primarily used with interest rates of the major countries to aid in determining currency movements.

Cycles: Short, medium and long-term cycles, as well as business cycles are also identified and discussed.

Our favorite gold timing indicator, for instance, identifies gold’s A through D intermediate cyclical patterns, which have been very consistent since the late 1960s. The As and Cs coincide with gold rises while the Bs and Ds identify gold declines.

In a bull market, the C rises are the best rise in the cycle when gold reaches new highs. This reflects a solid bull market. “A” rises don’t usually reach new highs but when they do, the bull market is very strong. The A and B movements tend to be moderate. The D declines are generally the steepest corrections within a bull market and this recurring A through D pattern usually lasts about 11 months from beginning to end.

Traditional Technical Analysis: Primarily, channels, support and resistance levels, trend lines, triangles, rectangles and head and shoulder formations are identified. Price breaks through trend lines and channels are significant because most charts are plotted on a semi-log, or ratio, scale. For this reason, a break in trend is not only a technical signal but it also indicates a change in growth. The longer a trend has been in force the more significant it is.

Approximate time definitions:

• Very short-term: under 1 month
• Short-term: 1 to 3 months
• Medium-Term: 3 to 9 months
• Long-term: 9 months to 2 years
• Longer-term: 2 to 5 years

OUR FAVORITE GOLD TIMING INDICATOR

Leading indicators are our favorites, but some work better than others. In gold’s case, our intermediate (medium-term) indicator has worked very well for decades.

Briefly, we developed these indicators over the years. Changes are often seen in the leading indicators before they are apparent in the price, so they assist in anticipating upcoming price movements.

The leading indicators generally help to illustrate when a market is oversold and, therefore, a good buy, or overbought and due for a downward correction or decline. They also help determine when a market has room to rise or decline further because it’s not yet overbought or oversold. Overbought and oversold areas are established based on historical high and low levels.

The medium-term leading indicators are helpful in determining when a market is due for an intermediate rise or a downward correction within its major trend. In other words, it tells us the best time to take some profits and when it’s time to buy new positions.

Gold, however, is somewhat unique in that it has also formed a recurring cycle, in both its indicator and its price, that goes back to the 1970s. One cycle is made up of four movements, which we call A, B ,C and D, and they have certain characteristics.

In a bull market, the recurring rises labeled “C” are the best intermediate upmoves when gold rises to new highs for the bull market. The “D” declines tend to be the worst declines. These are the two most important moves. The As and Bs generally coincide with smaller highs and lows in the gold price, which become consolidation periods.

The latest C rise ended in early January 2011. It was the eighth C rise in this mega bull market, which began a decade ago. Not only did gold hit a new high during this rise, which follows the pattern, but it was also the longest and strongest C rise in this bull market.

It lasted 21 months and gold rose 64% during that time. This surpassed the last two C rises, which gained 58% in 2006 and 55% in 2007-2008. The rises have clearly grown stronger since 2005 after gold broke above $500, which was a key level at the time. This is very bullish action, looking at the long-term picture.

D declines are normal downward corrections following strong C rises. But they do tend to be the sharpest intermediate declines in the bull market cycle.

Since the bull market began in 2001, the gold price has had seven D declines. The worst one was in 2008 when gold fell almost 30% during the financial crisis meltdown. This was an extreme case in an extreme situation.

Based on the averages since 2001, D declines usually last about four months. (But since the 1970s, they’ve been as short as one month to as long as seven months.) Percentage declines since 2001 have varied from 7% to 30% with the average being 15%.

Once the indicator gets down to a more oversold area, it will help signal that the end of the downward correction is near. This will provide an ideal buying opportunity for long-term gold holders who want to add to their positions. It’ll also signal a profit taking time for those who are short and/or short-term traders.

During D declines, it’s normal for gold to fall to near its 65 week moving average. The only exception was when gold fell below it during the 2008 crisis.