The Case for Gold
Bull or Bear
Gold has been the talk of the town: some are raging bulls, while others are raging bears. One thing is for certain - gold is the only bull market in town; and the precious metal has been the best performing asset of the past decade.
Hence, gold warrants our undivided attention, as we try to discern whether it is pulling in or out of the station; or crossing an important juncture.
With the above goal in mind, several different charts follow: each offers a different perspective of the larger picture. For the week gold was down $8.40 or 0.71%, closing at $1180.90.
Since making all-time highs on June 18, 2010 gold has declined about 6%, which is well within the parameters of a bull market correction. In the five months prior, gold gained over 20%, and was due for a rest.
Up first is a daily chart going back to July 2009. Several important features stand out on the chart.
Notice lower trend line support that goes back to July of 2009. Gold recently bounced off this support level.
The question is: is this the low or a low?If price breaks out of the bullish wedge formation, it will confirm that this is most likely the low.
Above: whenever gold touches its rising trend line a good buying opportunity has resulted. It is tough to buy when your back is to the wall, but in bull markets that is what works: buying weakness and selling strength. Below: the same result with a different "wall" - the 150 day moving average.
The next chart hones in on the recent action of the last few months of the gold exchange traded fund GLD. Several weeks ago I mentioned that the 114 price level was a likely support level that would soon be tested. The chart below shows why: this was the level from which GLD launched a breakout back in April - May; and a rule of technical analysis is that broken resistance turns into support.
Although price broke slightly below this level, it has since recovered and is now running into overhead resistance near 116. A break above this level is needed to reverse the short term trend. Note the spike in downside volume, which may represent capitulation selling, as CMF has turned positive.
The next chart tempers the bullish view. Notice that although both CCI & STO have reached oversold levels that in the past marked the beginning of rallies - one has not yet occurred.
One of the reasons is because MACD has yet to make a positive crossover. All previous rallies occurred after such crossovers - CCI & STO signals by themselves are not enough.
Now, let's take a look at some charts that have some negative features on them, to get a perspective on what could go wrong with the above interpretation of the charts. After all - technical analysis is subjective valuation, which could well be wrong in any given case.
The next chart is a weekly chart, as opposed to the above daily charts. Weekly charts provide a longer term perspective.
The most important feature on the chart below is the STO indicator at the bottom of the chart: it has not reached oversold territory that has provided set-ups for rallies in the past.
Note that there is no law that says that STO must become oversold before a rally can occur, as the rally from May 2009 shows. It is simply a matter of odds and risk to reward ratios.
The next weekly chart gives some food for thought regarding what could go wrong with the bullish interpretation of gold.
- RSI & MACD are flashing negative divergences
- MACD is still under a negative crossover
- Price has broken below the trend line extending up from the Oct. 2008 low
So, which is right - the bull case or the bear case? That's the $64 dollar question. Perhaps it doesn't matter, at least regarding the short term. Perhaps the trees are being focused on when it is the forest that should be viewed.
Gold is in a bull market, as evidenced by its series of higher highs and higher lows since 2001.
No other market comes close. A trend remains in motion until stopped, reversed, and proven otherwise.
As of now, gold remains in a bull market. In a bull market weakness is bought and strength sold.
It is impossible to call or time the exact low in any given market, let alone one as volatile as gold, especially in today's jittery market environment.
The prudent course is to slowly scale into positions when it appears that buying opportunities are presenting themselves, knowing that draw downs will occur, but that the trend is your friend until it isn't. Then it's time to cut bait and bail.
Incremental accumulations of positions will take some of the timing risk out of trying to pick the exact bottom, as it ain't gonna happen. If a cluster of buys can be made anywhere near the bottom, it will prove to be a hard act to follow.
Draw downs are inevitable and are part of the game. That's what makes the gold bull hard to ride. It is one of the tools it uses to throw riders off. It's hard to sell into strength; and even harder to buy weakness. Investing in the markets is not an easy task. The market gives no quarter, nor asks for any; it doesn't need to; it is a law unto itself.
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