This week's Chart of the Week video looks at gold and asks the question: oversold bounce or new bull market? So let's get technical.
Our basic set up is shown on this weekly chart of a continuous futures contract for gold. The red and black dots are key pivot points or the best areas of buying and selling or support and resistance. And this is your 40 week moving average.
The break below 3 key pivot points back in April was bearish leading to the waterfall decline in gold. This has also coincided with rising interest rates, which we believe is a significant headwind for the precious metal. Bearish fundamentals and bearish technicals equals a bear market in our book, and we stated so back in April.
Despite a 16% bounce over the past 2 months, the technical and fundamental picture has not changed. Gold hasn't broken any new resistance levels, which would be a technical sign of a market in recovery, and interest rates started their march higher in May. By these measures, we still have gold being in a bear market.
In fact, one of the key signs of a bear market changing to a bull market is that the old bear market paradigms no longer apply as the new bull market is being ushered in. In the past, we illustrated this nicely with this weekly chart of gold showing the MarketVane Bullish consensus for gold underneath. MarketVane is investor sentiment data.
In the 1990's bear market for gold when the MarketVane value got near 50, gold usually sold off. This is classic bear market action. Starting in 2001 or coinciding with the start of the gold bull market, gold didn't sell off when the MarketVane data hit 50. What used to be no longer existed or the old bear market paradigm of selling was squashed with the start of the bull market.
Over the life of the bull market, buying typically ensued when the MarketVane value got between 50 and 60. That is until, this past year when the bear market started. That failure of prices to bounce when they should have is consistent with a regime change from bull to bear. What used to be no longer exists...
Turning to the present, the rise in gold isn't ushering in a new paradigm. No resistance levels have been broken. The fundamental backdrop has not changed. For these reasons, we believe the recent gains in gold will be nothing more than an oversold bounce in an ongoing bear market.
One last caveat: while I don't profess to know it all, we apply strict quantitative criteria to our analysis. Back in April, 2013, I remember the ridicule and criticisms for even having mentioned the fact that gold was in a bear market. All I can say is "oh well" and to each his own. For those still holding on and I am sure there are a lot of you, you only have 200 more points and you are back to your bull market breakdown. As Dirty Harry would say...
This has been Guy M. Lerner with your chart of the week video brought to you by TacticalBeta Investment Advisory Service.
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