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Let’s simply cut to the chase and look at momentum on $GLD the way I would an index or a stock.

Monthly momentum: Negative

Weekly momentum: Negative (but oversold)

Daily momentum: Positive

Take a look first at the Monthly Fibonacci projection for targets on GLD. As one can see on the chart, we are at a key Fibonacci projection level that was based on the June 2005 low to the March 2008 high. The 127.2% projection of that line is roughly $116.53, and, as I have stated quite a few times on Vince Rowe’s show, the 1.618 projection of that line is still $136.96 (or right around $137).

Is that target now impossible to hit because sales of gold have softened and signs of deflation are contracting economic activity? A lot depends on what you think of Asian gold demand should prices remain soft in the near-term, and whether or not the Euro rally will continue. If the dollar weakens further and buyers return to the gold market, GLD (and gold basically) are simply trading at the low end of the tiny channel I drew on that monthly chart. A weaker dollar would mean at least a source of stability for GLD pricing, and perhaps even a rallying point for it and other U.S. dollar denominated assets.

I could probably convince myself either way and that is the dilemma traders, banks, jewelers, fund managers, you, and I have to face in this shaky and confusing economic environment.

What is most interesting is that since daily momentum is positive, it also appears that we have a bullish XABCD Fibonacci pattern that has completed (look at this chart). It is not a bullish Gartley pattern because the B to C line is not a 0.618 retracement of the A to B line, but the 0.618 retracement did hit a support area as momentum (expressed as CFGMO in the daily chart before, turned positive).

The daily neural net model did issue a buy 3 days ago, but here is the catch. It is highly likely that the swing trade is a 3 to 5 day swing trade that might (and probably should) end on Thursday. Why?

1) It is likely that the first target will be reached very quickly. If one looks at the 0.618 retracement of the C to D leg, one would come up with a target of 116.82, but there is a realistic chance (given that daily momentum is positive), that a gap fill at 119.13 is quite possible. The rapid decline in GLD (and gold) could be made up quickly as those bearish candles happened rapidly and can be erased rapidly. Take a quick look at this daily chart to see the measurement of the targets.

2) Employment numbers hit Friday (Non-farm payroll). That number will be sizably negative (because of loss of census jobs, but private payroll jobs will also be reported (est. to be a 90,000 increase). That is likely to cause a spike one way or another in the U.S. Dollar and its pairs in forex and currency futures trading, and that by proxy (since gold and GLD are priced in dollars) will cause a likely spike one way or another in the price of GLD and gold.

That means there are two potential scenarios for gold prices:

Unemployment is expected to be 9.6 % in the US. If for some reason unemployment is higher and the private payroll jobs substantially lower, we could see the US Dollar perhaps weaken against foreign currencies like the Euro (EURUSD). That would put upward pressure on gold prices (as a cheaper dollar would buy less gold), and the GLD rally could continue. A rally back to 122.79 is possible, and if the demand story for GLD holds up, that longer term Fibonacci upside target of 137 is still a remote possibility by spring of 2011.

3) If not, and the dollar strengthens (and by no means is this certain either), Gold could indeed correct back to 108.80 by September 30, 2010 roughly, and even back to 100 by spring 2011. See this chart.

Why do my predictions seem rather tame compared to some that I have seen?

1) I try to base my predictions on the patterns and momentum that exist in the market at this CURRENT time. They might not be perfect, but they ARE measurable. They have also been statistically solid over time.

2) I am still being biased to the upside based on the world demand for gold particularly in Asia. (You have to be a member of Seeking Alpha to read that article, but its free to join, so why not?) Gold is as much being purchased for jewelry and personal use as it is for an inflation hedge. Institutions will buy and sell it to stabilize their cash positions as a hedge. As long as demand is up and it outstrips supply, the price bias should be bullish.  Doesn’t necessarily mean it will be, but it should be.

3) The two major world currencies are in the hurt locker because of sovereign debt and entitlement spending issues.  It boils down to which garbage bag do you want to carry your liquid assets in? Will it be the U.S. dollar garbage bag, or will it be the Euro garbage bag?

 The advantage of the U.S. Dollar garbage bag is that it can easily print its way out of its debt problems, while the Euro cannot, or at least, not easily. Since the U.S. Federal Reserve can print (and LOVES to print) fiat currency, that is a bullish mark for the devaluation of the U.S. dollar. That is, it is bullish for gold and GLD if that trend continues. If China and other companies call our bluff and want their money back, our rates go up and that sets off a huge chain of bad events. That’s the downside of the U.S. Dollar garbage bag. Fortunately because of the manufacturing/consumption symbiosis of China and the U.S., the jawboning that falls just short of bluff calling continues. If the U.S. continues its profligate debt accumulation, however, the day of reckoning gets ever closer.

The real downside of the Euro garbage bag is that the sovereign debt problems continue to be a real concern, and it seems only Germany has the economic strength to hold the Euro-zone together.  Stress tests may have calmed investors and institutions for awhile, but there are more debt issues around each corner, and only so many ways to plug the holes in the debt dyke. The Euro-zone has little in its arsenal other than austerity to fix its debt crisis and is slowly implementing it. That will be its greatest challenge for the next decade or two. For that reason, the Euro could ultimately weaken, or perhaps even dissolve if all of these problems are not fixed.

Having said that, which way do I think GLD will go?

1) Through Thursday, I think GLD could go anywhere from 116.82 to 119.13.

2) After that, one of those two scenarios will likely play out. GLD will either hit 137 or fall back to at least 108.80 and perhaps back to 100. That bullish XABCD pattern would be the genesis of that new rally, and the low hit by GLD over the last few days would redefine the long upward channel that started during late 2008.

What do I think are the odds of either scenario happening? I have not one clue, but I do believe it will take until after traders get back into their seats post-Labor-Day for any real directional trade to happen, barring some critical world event (which I cannot forecast).

I think most people are feeling a bit like Merle Haggard did in 1974 (a year with another rather harsh recession) when he sang this song. Should employment numbers not signal growth, many U.S. employees will be wondering if they can afford Christmas cheer, let alone gold. That would also force rates to remain low, something that would tend to weaken the U.S. Dollar relative to other currencies. That too, would be net bullish for GLD and Gold.

I do not have a crystal ball, all I can do is react to patterns and trade them Currently, there is a long trade with a maximum terminus around 119.13 on GLD, which has a ratio of dollars profit to dollars lost of 1.60/1 and has 71.1% profitable trades with a five year track record with 54 out of 76 winning trades. After that, only time will tell.

If I knew the real answer, I could be drinking all the free bubble-up and eating that rainbow stew until I pop.

Let’s keep our eyes on GLD. We are at a pivotal moment in its trading history, I think.