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Gold Update: Meandering Lower at Trader’s Narrative

Gold Update: Meandering Lower

Let’s take a look at the gold market and see where things stand. At the end of January, as both gold and gold stocks were falling, I mentioned that based on gold had lost enough fair weather friends to signal the end of the sell off.

That was an actionable call since within a few days, both the precious metal and gold stocks found their footing again. The AMEX Gold Bugs index at 370-375 and gold at $1060. Even though the gold sector stopped going lower, it wasn’t able to really bounce back with any gusto.

Here’s a chart of the Philadelphia Gold and Silver Index (XAU) showing that its components were not able to muster above their 100 day simple moving average:

XAU percent above 100 day moving average
Source: TheUpTrend

To reiterate, gold has been losing momentum for a while now. This chart, showing the percentage of XAU components trading above their 100 moving average eke out a bounce to 30% shows just how weak this market is relative to other sectors.

Looking at sentiment for the gold sector, MarketVane’s Bullish Consensus is really high at 77%. It was slightly higher (81%) back in late 2007: Gold Sentiment Too Bullish. The Hulbert Gold Newsletter Sentiment, in contrast, is middle of the road at 47%.

Here’s another way to look at gold breadth, the Bullish Percent Index for the Gold Miners Index (GDM) compared to the AMEX Gold Bugs index:

gold miners bullish percent index compared to HUI index

This chart confirms that breadth has completely changed. Before, shallow pullbacks were bought by traders and the up trend would resume almost immediately. But now, the tone is very different.

Check out this short video from Adam Hewison of INO where he explains what level he’s watching for a reversal lower. As for the Rydex, so called “dumb money”, here’s an updated chart which I shared with you a few weeks back (Gold Sentiment: Dumb Money Rushes Out):
Rydex precious metals assets NAV Mar 2010

We see the same thing. In contrast to the previous dips, traders are not buying (and increasing the asset levels of the Rydex Precious Metals fund). Something is different.

Looking at these charts, it should also be clear that the gold sector is far from a hedge for the stock market. In fact, gold stocks track the general stock market more than anything. So seeing gold stocks act weak even as the market itself heads into prior resistance with a very lopsided put call option outlook, makes me even more cautious.

If you were lucky or astute enough to rent the bounce higher from early February, don’t over over stay your welcome.

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2 Responses to “Gold Update: Meandering Lower”  

  1. 1 Mike

    I’m far from being a gold bug; this year I’ve spent far more time being short the sector than anything, but I did enter into long positions in the sector on Monday for a couple of reasons.

    First, the USD has failed to hold above 80.40 on the index and is in danger of breaking back down below the rising trendline out of the late 2009 rally start.

    Second, the euro has been beaten up hard, and Sterling more swiftly still, so a bounce back would not be out of the question.

    Third, doesn’t affect timing, but it is/was only a matter of time before renewed focus on all heavily indebted countries, the U.S. included, starts to be the topic instead of just the PIIGS.

    Finally, the daily chart of Gold is pretty constructive looking of late, with higher swing highs and higher swing lows on the daily chart and a not too-deep pull back after the last attempt to break and hold above 1120, a level which has proved to be support and resistance off an on for all of 2010.

    price of gold chart

    It’s thin gruel but a reasonably high reward to risk trade to be long the miners as of yesterday, which also happened to be a 3 inside up trade setup. I’ve got my stops at break even already and we’ll see what develops overnight. Hopefully the currency picture allows for at least an opening pop but it would not surprise me to see a serious attempt at pushing > 1120 and holding there.

    That said, the sector has been trading poorly, much more poorly related to recent currency gyrations, over the past while. Perhaps rotation out of the group is to blame, but if the broader market is going to stall or go sideways, that might also be reason enough for some to rotate funds back into this sector.

  2. 2 Mike

    Following up on my comments yesterday, lets look at the US Dollar index - a much more muddied chart than Gold itself:

    I’ve been stalking and aggressively trading swing lows in the gold sector for a while now after observing that the dollar index had failed to hold above 81 in February and even with the fairly recent plunge in Sterling had failed to even regain 81 in March. That to me was an indication that Sterling and euro were likely to reverse course for a period of time, not just crawl along the bottom. Whether that plays out or not is being determined now, but it did seem like a good high return opportunity to chase.

    In the medium term the US Dollar uptrend is in the process of reversing and by that I do not simply mean the break of the rising trendline of the late 09 rally. 79.50 on the USD index can be used to define the lower most trading boundary of the uppermost trading range; while the Dollar trades lower than that we can state the up trend, which had bent into sideways consolidation, has now reversed. Of course confirming that will require a series of lower swing highs and lows on at least a 2 or 4 hour chart if not the dailies, and by the time that happens the good speculative entry positions might be far in the rear view mirror.

    We can’t foretell how far it may go - we may find that it establishes a firm hold near the rising 50 period moving average (T2) or may pull back far more substantially if the news from Europe improves at all (and it did somewhat today). I can well imagine a right hand shoulder forming on a bounce after the USD solidly pierces the rising trendline marking the late 09 rally (rising orange line).

    We also can’t foretell how soon before the move might get into full gear but six weeks of consolidation/congestion and then a reversal or continuation of a move is not unusual, so with luck, whatever happens, it happens soon.

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