Week Ending 7/09/10
For the last few weeks I have shown gold constructing negative divergences in both its relative strength (RSI) indicator and in its moving average convergence/divergence (MACD) indicators.
RSI can be found at the top of the chart; and MACD can be found at the bottom of the chart. The divergences took time to resolve, but they finally did, with gold moving lower, as expected.
There are four types of divergences, but I will only describe the one presently occurring. The other types will be explained in future reports. Positive divergences that take place in a bull market can lead to powerful moves up.
From mid-May to late June gold made a higher high. However, during that time frame, both RSI and MACD made lower highs.
The lower highs made by the indicators did not confirm gold's higher price high. What this shows is that although price was strong enough to forge a new high, the momentum and energy behind the rally failed to move the oscillators and indicators (RSI & MACD) to a new high, which in turn produces a negative divergence.
This indicates that there was not as much conviction and power behind the move as in the prior moves to new highs. Gold is losing some steam and or momentum.
For the week gold lost -0.11% compared to last week's fall of 3.5%. It appears that GLD is trying to forge a bottom, but it may take some more time and one last move down into oversold territory.
Price is testing support between 114 - 116, which goes back to the May lows and April highs (114); and GLD's lower diagonal trend line from Feb. (116).
It is important for GLD to hold the 114 level, or a more serious decline could develop. If the 114 area holds it may offer a sweet spot to accumulate positions.
Note the negative divergences in RSI and MACD on the daily chart. The weekly chart shows negative divergences, as well.
The weight of the evidence says down for gold over the short term; however, the medium term remains up; and the long term trend has been in a secular bull market for the last decade.
On a worst case scenario, the weekly gold chart shows the potential of a drop back to the $1000 price level; although is becoming less likely with each passing day of stabilization.
The GDX index gained 2% this week, closing at 50.48. This week's gain follows last week's 8% loss. The GDX has had a hard time staying above 54: it has been repelled three times in the last two months.
The daily chart shows the index testing lower support of its rising price channel. CCI and STO are at oversold levels that have led to rallies in the past.
The gold stocks look to be trying to forge out a bottom, but these set-ups MUST be followed by a positive MACD crossover to confirm sustainability.
The above excerpt was from this week's 30 pg. market report available at the Honest Money Gold & Silver Report website. A trial subscription is available. We believe there are some outstanding opportunities coming up in the precious metals sector in the not too distant future. Stop by and check it out. We invite you to read past reports and the profit performance of stocks recommended.
Good Luck. Good Trading. Good Health. And that's a Wrap.