In our study this week we examined what sort of affect QE∞ may have had on the markets and metals. For the very short-term, it became apparent that almost all markets popped up powerfully upon Ben Bernanke’s speech.

However, as we examine the daily charts it also becomes apparent that the technicals are crying out for a consolidation, perhaps even a violent one. That doesn’t mean we can’t go higher. It does mean that something most give. Sometimes these conditions are pushed farther out, but generally not for long. However, there are times when prices only fall back a little, allowing the technical “pressure” to subside before heading higher, like we saw in the last quarter of 2010.

Since so many sectors are showing the same topping signs, our current expectation is for a strong consolidation. And, while we’re not expecting a crash, we do expect the strength and depth to be enough to scare a few folks and make it painful for stockholders. With this in mind, take a look at our weekly chart below.

Remember that our daily chart revealed that we’re severely overbought right now. But in this chart, while we’re seriously into the overbought territory, it doesn’t look nearly as concerning as the daily chart did. In fact, if the market were to simply take a break here, these technicals could easily come down to more average levels. Also note that gold typically maintains an RSI above the 50 mark, unlike stocks and major indices. Generally speaking, it seems that in the last few years that gold has its most severe pullbacks only after breaking 70 on the RSI.

Also note that the MACD is still heading upward and just barely into positive territory again. This points to an upward trend in gold, although it doesn’t necessitate it. And it certainly doesn’t tell us that we won’t have some consolidation. In fact, the RSI all but guarantees at least a notable pullback in gold prices in the short-term.

Now we’ll take a look at the monthly to see what the more medium/long-term outlook is. Now we’re starting to get another picture. Note that on a Monthly basis, during the past eight years, we really have only had one very hard contracting in gold’s prices. The overbought conditions of 2008 caught all markets up in their wake though, so it’s certainly expected.

Furthermore, the drop from the highs of 2008 brought us into the most severe oversold conditions in gold during the entire decade. It’s from that bounce that we’re currently enjoying the continuation of a multi-year (perhaps multi-decade) bull market in precious metals.

Again note that even the “oversold” conditions of 2008 weren’t really drastic, as they never even crossed below 50 on the RSI. The MACD has remained positive over the past several years as well.

With the RSI pointing upward, we certainly seem to be in an uptrend. The MACD may be giving us some signs that we’re do for a retraction though, as it’s seeming to get its second wind after rolling over from last year’s highs.

As you can see, the larger time-frame charts are beginning to paint a different picture for gold than the daily did. For traders, this is a time to be seriously considering raising your stops, picking up hedges or even shorting the market. But for most of us it’s simply an observation that helps us understand where we’re headed. If we’re in the market to buy, we might wait a couple of weeks to see if we get that consolidation in the form of a strong drop or if it simply meanders a bit, allowing the technicals to recede before heading up.

For your prosperity,

J. Keith Johnson
The Gold Informant