Larry Pesavento: “The gold market has been parabolic over the last 10 weeks and has approached an overbought situation that has not been seen since 1980 when gold topped at 865 an ounce. The Gold bug index (HUI) is showing a three drive to the top pattern along with the butterfly pattern. Within the butterfly pattern you can easily see the AB=CD pattern that is also known as the thunderbolt pattern. This is telling us that the market is incredibly vulnerable to a correction in gold.
We are seeing the same type of pattern evolving in the gold/silver index (XAU) but it is coming at a level where we’ve had three declining tops. Should you be long gold and silver it would be wise to ask yourself this question.? Why haven’t the gold and silver stocks gone up with the price of gold? Part of the answer is because the stock market has been been down dramatically but that is only one element. Silver, known as the poor man’s gold, is particularly weak as it is unable to make only a 61% retracement off of the April 25 highs. Patterns such as those in gold and gold bug index are highly predictive of a major top, if not, at least a major correction. As always it is good to remember that these are only probabilities and not certainties. Good money management and risk control are tantamount to anything related to technical analysis.”