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Chart In Focus

Bumpiness Is A Message

Chart In Focus
January 14, 2011

A lot of technical analysis is oriented on evaluating the patterns in prices themselves to gain insights about what the future holds.  But there are also useful patterns to be found in the indicators that are based on price movements.  That was one of the key insights revealed in Sherman and Marian McClellan's book Patterns For Profit.  It is the patterns more than the levels that matters.

This week's chart looks at the Price Oscillator for gold futures.  A Price Oscillator is calculated as the difference between a 10% Trend and 5% Trend of closing prices (AKA 19 and 39-day EMAs).  See also calculating the McClellan Oscillator.  Gold recently had a strong run that took it up above 1400/oz for the first time, and that pulled the Price Oscillator up to a nice high level. 

The key lesson for this week's chart examination is that the manner in which a Price Oscillator moves tells us important things about the future.  When a Price Oscillator makes a very smooth movement up or down, it is an indication of a strong and organized move.  The strength can be in the hands of the bulls or the bears, depending on which direction sees a smooth move. 

A bumpy move, on the other hand, conveys a message of disorganization and tentativeness.  So a bumpy move is a message of weakness for the direction in which it occurs.  The recent decline in gold's Price Oscillator has seen it bumping its way down from the overbought reading and back toward zero.  The gold bears have not been able to get themselves organized to mount a real decline.

Taking the Price Oscillator up to a very high level, or down to a very low level, merits a corrective move to get back to neutral.  That's what the Price Oscillator decline since October has been about.  The fact that the move up was smooth is a message of power for the bulls.  The fact that the Price Oscillator's move down is bumpy is a message of weakness and tentativeness for the bears.  The conclusion offered by these two messages is that the gold bulls are the ones really in charge, and that we just have to wait for the corrective period to run its course before that power can be observed in a further up move. 

Readers of our twice monthly McClellan Market Report know that we have been looking for a major cycle low in gold prices due in January to early February.  To find out more about the types of information offered in that publication, check out the samples here.

Tom McClellan
Editor, The McClellan Market Report

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