Trader’s Narrative

Gold is once again at the magical $1000 threshold. It was just a few months ago that I talked about the precious metal and mentioned that I spied the sign of a gold top. That was in early June when gold was trading at $980. That was a great call because into early July gold fell to $905.

Here are various perspectives on gold’s current technical outlook and at the end, my own take:

MarketClub
On August 6th, in a video titled “Has the bull move in Gold finally arrived?” Adam from MarketClub explains why he was (correctly) bullish. At that time, gold was trading at around $965. It dipped slightly in the following weeks and then pierced the psychologically important $1000 line in the sand.

In a more recent video, Adam asks, “Is this the move we have been waiting for?“. To find out what he thinks now, click the link or graphic to watch the video:

He shows a long term chart of gold and talks about “energy fields” on the chart. This is Adam’s name for what most others call periods of contraction in price range, which often precede periods of expansion in price range.

Adam’s got a ‘hot hand’ right now in gold as he’s been correctly calling the direction for some time. To learn more about his approach, here’s a short introduction to MarketClub Alerts. Besides all the great material they offer, what I like about MarketClub is that they stand behind their product with a 100% no questions asked money back guarantee. That’s the touchstone of a reputable and solid outfit.

DecisionPoint
Carl Swenlin’s recent commentary on gold is also bullish:
Continue reading ‘Various Perspectives On Gold At $1000′

We took a look at the long-term chart of gold Monday. Here is a video with more short-term technical analysis of gold using Fibonacci ratios. Watch it till the end to get the outlook for gold:

While everyone’s attention was on a head and shoulder pattern completing on the Standard & Poors 500 index, another head and shoulder formation was taking place in gold. As the magical $1000 marker acted as strong resistance several times, a consolidation pattern emerged below it.

Here’s a good video update of the recent price action. Click the chart below to watch the video:

While head and shoulder formations are usually considered to be reversal patterns, they can also act as continuation patterns. This is less common and fewer technical analysis students know about it, which makes it more likely to complete. As we’ve all noticed by now, the head and shoulder formation in the equity indexes was noticed and watched closely by everyone and their uncle. Which is why it turned into a bear trap.

The other possibilities are that we could get an irregular head and shoulder pattern. This is a variation where the shoulders are not symmetrical. For example, we could have two shoulders form in the right hand side. The whole pattern would still be valid but it would take longer to play out.

Also, we could see a sideways trading range which would then suggest a large cup and handle pattern instead. Either way, if the price of gold continues to trade within a short distance from the $1000 resistance, the probability of it breaking up increases.

Finally, we can look at the K-ratio to get a sense of the gold market. This is a ratio of the gold equities compared to the price of gold itself. It was first proposed by the technical analyst Jay Kaeppel and I estimate it by using the Philladelphia Gold Index (HUI) and the futures price of gold - instead of the original formula of Barron’s Gold Mining Index and the Handy & Harmon price. There is a minor difference in the two but the important thing is keeping things consistent by picking one method and sticking with it:

According to the K-ratio, the best time to buy gold stocks was in late October 2008, when they were almost as cheap as they were back in 2001. Of course, we now know the 2000-2001 era as a generational opportunity to buy gold - just as the majority were preoccupied with the technology sector. You can also see that the 200 rate of change for the ratio was confirming the buy signal. Right now they are both in neutral territory. This presents a bullish opportunity because if the price of gold breaks through the long term resistance, the K-Ratio still would have room to move up before becoming overbought.

Last Call
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Time to ‘fess up. I’ve been horribly, horribly wrong on gold. So much so that now I’m afraid of being labeled a contrarian indicator!

So let’s see, in December I thought I saw a tentative double top in gold… which didn’t materialize. Instead, gold paused by trading sideways for a month and then continued blazing higher and higher:

To be fair, a double top formation is only triggered when the neckline (the dotted line on the graph above) is pierced. Since that didn’t happen, we didn’t officially have a double top, at least according to the widely accepted definition within technical analysis.

That doesn’t absolve me as I’ve been skeptical of a continuing gold bull market. And I’ve been wrong, wrong, wrong. Gold’s climb has been unrelenting. Just today it closed at $949.20 on the Merc, taking it within a nugget’s throw of $1000.

But while the price of the commodity is 12% above the swing high in November 2007, gold stocks - as measured by the Gold Bugs Index - are barely peeking above those levels. So if you’ve owned any gold equity, instead of the metal itself, you’ve lost out on a lot of money.

The k-Ratio
The discrepancy can be seen in the k-Ratio which shows a slightly downtrending chart (in the short term):

Since the k-ratio has entered a channel, the easiest strategy is to buy gold stocks only when it approaches the “floor” and to sell them when it hits the “ceiling”. I’m hesitant to venture into any trades with a longer time frame since I’ve been clearly off my game on this sector.

I think my mistake was that I used the k-ratio’s valuation message to mean that gold’s trend couldn’t continue. Boy have I been schooled. The valuation is still high - historically - but that doesn’t mean that a trend can’t continue. The k-ratio is an amazing tool but it is really useful in giving you the really big picture. For anything more granular it falls apart.

Seasonal Pattern
Surprisingly, the rise we’ve seen in the price of gold has been against the headwinds of seasonal patterns. Historically, the period of time from the end a year to the end of March of the next year has been a very bad time to be long gold. It is exceptions to such seasonality “rules” that remind you that the market doesn’t have to follow any dictates, no matter how well founded.

In case you’re wondering, the best time in the calendar to go long gold is at the end of August and into October. Traditionally, this short time frame has provided the biggest boost to the price of gold. But right now the summer is way too far away for me to use it to place any bets.

Sector Breadth
Finally, as an attempt to peer into the fog of future prices, lets do a quick review of the current breadth in the gold sector.

Almost 86% of the gold stocks that comprise the sector are trading above their 200 moving average. Since this is a strong bull market, the percent of stocks above their long term moving averages has been consistently high with only a few short blips lower.

In January it even reached the rare maximum: 100% - around the time that the Gold Bugs Index (HUI) topped out at ~480. This statistic tells me that if I want to go long gold stocks for an intermediate time frame trade, this isn’t it. Not even close.

Thanks to today’s strong close, 100% of the gold stocks in the sector are trading above their 10 day moving average. At the beginning of the month, that number was less than 10% - so again, this is not a good time to go long, even for a short swing trade.

The best combination of breadth is strong long term (200 day average) and weak short term (10 and 50 day moving average). A good example was in mid December 2007 when there were only 10% trading above their 50 day MA and 5% above their 10 day MA with a very high 60% above their 200 day MA.

I’m keeping a wary eye on this sector until it presents a similar setup and will post about it.

Most people assume automatically that a sustained interest rate cut campaign by the Federal Reserve has obvious consequences for the stock market, the dollar, commodities and gold.

The common line of thinking goes that interest rate cuts will help the market, by making equities more attractive relative to bonds, hurt the dollar by making it less attractive in the currency market, push up inflation - in other words, boost the price of commodities, and naturally then, push up the price of gold.

Myth Busters
But is any of that actually true? Does the real market history bear similar witness or are these assumptions… nothing more than myth?

Jason Goepfert of Sundial Capital (SentimenTrader.com) looked at the 8 instances since 1971 where the Fed embarked on an interest rate cutting rampage. He then looked at what effect that had on the various markets.

What?
The results are surprising. Interest rate cuts are good for the stock market. But that’s where the easy thinking ends.

The US dollar, in contrast to all you’ve heard, actually was the better for such slashing of rates. Commodities and gold were the poorer for it. And the long side of the bond market was mixed.

These results are aggregate data, smoothing out each year, of course. And we could have an aberration to the general tendency and see the dollar tank further, gold go up and stocks go down. Anything can happen in the markets.

Here are the graphs for 2001 as an example of the 8 instances:

You can try out Jason’s fantastic service for 14 days at no charge. I suggest you take it for a free spin. If you’re serious about the market and want this kind of fresh, unbiased analysis.