No sooner do I write a bullish commentary about the repeated cup and handle formation in gold in mid-June, than the yellow metal decided to walk right back from completing the most recent example of that pattern. It is a good thing that I’m used to the market liberally heaping such indignities on me.
Since mid-June, the price of gold has drooped from $1256 to $1161 or -7.6%. Within the context of gold, which is a rather volatile commodity, that magnitude is relatively small. More importantly, price has still held the short term rising trend line:
Citing several technical characteristics CitiFX Technicals believes that gold still has chance to challenge the old highs and reach new ones:
- Remains in the rising channel with good support coming in at $1,161 where horizontal support converges with the channel base
- Overall we expect further gains towards the $1,340 reverse head and shoulders target
- A weekly close below $1,161 would suggest a deeper correction down in the short term
As well, the bullish percent chart of the gold sector is at 45%. This is neutral, especially if we compare it to the February 2010 correction when it fell to 20%. That was the lowest bullish percent level for the year.
Massive Exodus From Rydex Gold Fund
Perhaps most interesting of all is that last week we saw a huge drop in the assets of the Rydex Precious Metals Fund; from Wednesday’s $171 million to Thursday’s $102 million.
Click to see a larger chart in new tab:
This takes assets back down to levels that we last saw at the end of the last cycle correction in early February 2010: Dumb Money Rushes (Out of Gold)
The fact that we had such a large drop in assets points to a large player. Usually we see Rydex assets ebb and flow with much smoother (smaller incremental) changes. I don’t think that just because we have a large player capitulate and withdraw assets this has any less significance. The pattern is the same but what makes this somewhat suspect is that Rydex funds are not always the playground of the retail trader. After all, most retail market timers don’t have $70 million to punt around on sectors.
According to the Hulbert Gold Newsletter Sentiment Index, market timing newsletters that specialize in the previous metals sector are currently recommending +9.2% exposure to their clients. While it certainly can go lower (and into negative territory, suggesting a short position) during a strong bull market this is rare. The last time the HGNSI was lower was last July when it fell to -10%.
Finally, according to Jason Goepfert, the gold futures put call ratio is now more skewed (towards the bearish puts) than it has been for the past two years. While this derivative market is not the domain of the retail trader, the put call ratio of gold futures has been a good contrarian indicator historically. So the current elevated level suggests that there is real fear that prices will fall lower.
So everything considered, if gold is still in a long term secular bull market, then we have several indications that the correction is over.
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