Market Wrap

Week Ending 7/16/10

Gold

Gold was holding up fairly well going into Friday and then it fell hard along with the stock market. For the week, gold lost 18.40 (-1.52%), closing at $1193.00 (continuous contract).

The first thing to note is that gold is the only bull market existent. Until proven otherwise, the recent correction is just that: a correction in a bull market. The intermediate and long term trend remains up.

Yes, the drop from late June has been quick and violent. And, yes such action coming immediately after all-time highs is tough to take, but that is what bull markets, and especially gold do: they try like hell to shake off all riders. Gold is very volatile and the gold stocks even more so.

Trading anything is difficult at best. Investing in an established long term trend has a much better risk to reward ratio. So, remember - gold, as of now, is in a long term bull market, which means buying on weakness that holds support is the best risk to reward set-up the markets are offering.

Because the recent correction in gold has many investors and traders spooked, I am going to show several charts that are a bit redundant, but they each show certain nuances that I think are worth noting.

I actually like the fact that gold has many spooked and is moving lower and offering better prices. It remains to be seen where gold bottoms and whether it holds major support, thus keeping the long term trend intact, but I believe it will; and if it does, it will offer a good entry price for new positions.

For the past few weeks I have posted gold charts showing negative divergences in RSI and MACD, both on daily and on weekly charts. Volume did not "pop" up significantly on the move to new highs. These were all warning signs that something might be up. If you go back and read the last few reports the exact words were used: warning - something may be up.

That is all any indicator can do, as none are infallible or even close. Many times they give false signals, etc. But sometimes they also give good warnings. This was one of those times.

Up first is a weekly chart that shows the negative divergences that have now played out with downside price action. MACD has made a negative crossover, which suggests lower prices. The various support levels are marked.

Next up is a daily chart that goes back to August of 2009. It clearly shows the long term trend to be up. The next support level comes in around 1175, marked by gold's lower diagonal trend line and horizontal support going back to the May lows.

Now, let's look at a daily chart that hones in closer on recent price action. Gold (GLD) can be seen rising up strongly since late March, making new all-time highs in June. GLD then dropped and consolidated for a couple of days and then plunged in early July.

Next, GLD had a slight rally that formed a bear flag and ran into resistance around 119.5. On Friday, GLD fell hard and is testing support at the 116 level.

Note that the 38% Fib retracement level from the April lows to the June highs is at 116.74. If support here does not hold, then the 114 area comes into play.

The last gold chart is a weekly chart going back a couple of years, showing gold's 2008 reaction low. Gold has almost doubled in price since these lows. Overlaid on the chart are two sets of Fibonacci retracement levels.

The blue set goes from the 2008 lows all the way to the recent all-time highs. A 38% retracement of the entire move comes in at 1050.02.

The second set of Fib numbers are in black and extend up from the 2009 reaction low to the recent new highs. A 50% retracement of this move comes in at 1062.64.

The yellow highlight marks the overlap of these two retracement levels. Often times when two Fib levels overlap, they can mark an important support level. Note that this level is close to where gold broke out of its inverse head and shoulders formation.

Gold Stocks

With both physical gold and the stock market down for the week, the gold stocks (GDX) took it on the chin, falling 3.84%, most of which occurred on Friday.

The daily chart shows the GDX breaking below trend line support and testing its earlier July low. MACD is still under a negative crossover, which I mentioned last week would have to turn positive for the index to rally. This is still the case. It looks like support in the 46-47 area is going to be tested next.

It is worth noting that the gold stocks (GDX) underperformed both physical gold and the overall stock market this week.

This warrants watching, as it is a type of negative divergence that could be indicating further weakness in the precious metals sector.

Below the Hui/Gold ratio has broken down below its price channel, showing the overall weakness of the gold stocks compared to physical.

The smell of deflation returned again this week with stocks, oil, industrial metals and the precious metals all falling in concert. The pm stocks were hit particularly hard.

Until the dust settles no new positions are warranted. Sometime in the not too distant future - gold and the gold stocks will be putting in a bottom and offering better set-ups than presently is the case.

Good Luck. Good Trading. Good Health. And that's a Wrap.

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