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TheStreet Open House

Gold and Oil on the Verge of Something Big – but Heroes Rarely Win

NEW YORK (TheStreet) -- Everyone has been calling for a bottom in gold throughout the last year. But the fact is that gold and gold stocks are still clearly in a bear market. Just look at the 200-day moving averages. The previous trends were down and prices have been moving sideways for the past year.

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A lot of newsletter writers and analysts are calling a bottom. Technically it's just a consolidation pattern. Consolidation patterns are a continuation pattern, meaning if the previous trend was down, which it was from 2011 till now, the odds suggest that the price will continue lower after this consolidation.

goldbear

If this consolidation does happen to be the bottom then we can classify it as a stage I base. Gold (GLD) and gold stocks will start a new bull market, but the price needs to break to the upside of this consolidation pattern. Until it breaks to the upside, it is still in a down trend.

Gold topped out over three years ago. And I am in no rush to try to pick a bottom and be a hero here. I'm just going to continue waiting on the sidelines until the price confirms either a new bull market has started or the price breaks down and we get another leg lower.

Oil Outlook

For the big picture of crude oil, the chart looks bearish. It too has been trading in a range since 2011, and the price is nearing the apex of a consolidation pattern.

oilbear

It's important to know that a pennant formation -- which is what crude oil has formed -- is the most predictable when the price breaks out of the pattern within the first one-third of the formation.

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The longer the price consolidates and gets squeezed into the narrowing apex of the pennant pattern, the more unreliable the trend breakout will be. It becomes at best a 50/50 bet.

Crude oil's previous trend was up, but it's been consolidating for such a long time that price is now squeezed into the apex. This negates that bias for the previous trend to hold true, so we have no idea which way it will break out. But when it does, expect an explosive move.

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