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Market Analysis: Gold

11/8/2014 9:47:38 PM

Is this natural? Some people say that the overall economic condition is inversely proportional to the price of gold.

In fact, the meaning of the price of gold - besides the obvious - is less about the state of the economy and more about the psychology of short-term investors. Gold tends to rise along with negative sentiment or uncertainty, which isn't necessarily correlated with factual economic problems. Thus, when gold rises, it is more reasonable to state that investors are uncertain about the short-term prospects of the market.

Today, we will take a look at what gold might tell us about the upcoming week. We will start with taking a look at the candlesticks for good. We are looking for gaps, which we do not see:

Gold Daily Chart

However, if we increase the sensitivity of the movements in gold, we do find a gap. We increase the sensitivity by looking at VelocityShares 3x Long Gold Exchange-traded Notes (ETN) - ticker UGLD - which is linked to the S&P Gold Index ER. Look at the candlesticks now, and we find gaps:

UGLD

Note that both the gap on Nov3 and the gap on Nov5 are associated with trading within the normal volume of this ETN. This would make both of these gaps "area gaps." And we know that area gaps tend to fill the majority of the time.

In fact, on Friday, the second area gap was filled quickly. This leaves the first area gap open. I expect it, too, to fill.

Another piece of evidence that the gap will fill and thus indicate a rise in the price of gold is the pattern of the five recent candlesticks. Though not a standard pattern, consolidating the candlesticks on Nov3 and Nov4 as well as the candlesticks on Nov5 and Nov6 gives us an abandoned baby pattern, which results in a short-term bullish trend. The gap indicator and candlestick indicator from my Gap Method analysis both point to bullish.

Let's look at the overall trend to get an idea of where gold is at the long term. Remember that funds and stocks that are at a yearly low tend to be bearish - unless they are also at a 3-year low. Though UGLD is at a yearly low, it is also at a 3-year low, which points to a bullish reversal - statistically, at least.

UGLD 2

So what can we conclude from all this? The recent drop in the price of gold corresponds with a market that has made new highs. Investors and traders showed confidence in the market last week.

But my prediction of a coming bullish trend in gold should imply that investors are beginning to question whether these highs will continue or whether the market has topped off. Should my prediction prove right (and remember, my Gap Method is correct 91% of the time with the correct candlestick patterns), we should see a rise in gold and a corresponding fall in investor confidence. Though the market is going strong, we should be cautious about the possibility of a bearish reversal.

 


As always, if you have any questions, feel free to send me an email at damon@stockbarometer.com.

 

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