By Chris Rowe - Creator: Technical Analysis Millionaire
When Gold prices got slammed, did you get caught in the bloodbath or did you profit?Guess which sector is luring investors back in again, right this very second...
Precious metals have recently been the talk of the town as an oversold bullish play for both the precious metal commodity as well as the gold miner stocks. But what awaits you around them there hills?
The sector has certainly gained notable strength recently. We simply cannot ignore the short-term bottom and recent strength. If you're asking yourself if you should jump in, the answer is based on your time frame and investment style. After all, what might be a good purchase price in the eyes of Warren Buffett (whose time frame is said to be several decades) may not be a good price for a good swing trader.
I'll lay out the picture and let YOU decide if it makes sense for YOU to get in.
- As a short-term trader I'd stay away from the sector.
- As an intermediate-term trader I'd stay away for now.
- As a long-term investor I'd be more inclined to find an entry price in here somewhere.
The first chart, below, is the Exchange Traded Fund that tracks gold prices -- GLD. It's what you'd use to trade gold if you don't want a futures account. Keep in mind the price of gold is highly correlated with the price of gold miner stocks (I'll get into that in a second).
After seeing such a huge decline, of course investors are considering whether they should get in.
INTERMEDIATE-TERM
Two insanely sharp sell offs -- in early April and late June -- speak to the intermediate term picture. They tell you that intermediate-term traders (weeks to months) recently exited in a big way. That means it isn't likely that those intermediate-term traders will "have your back" any time soon. They just got out of a bunch of gold.
SHORT-TERM
Short-term we did see some strength. We saw it already. If you look at the picture above, you can see a gap lower in late June. Gold made a "dead-cat bounce" to close the gap (as expected). While it may continue higher in the short-term, on a risk adjusted basis it's just not worth chasing it. Especially since the next larger trend (intermediate-term) is weak. There's more -- in a second...
Let's consider the bullish argument here (both are valid). You can see the more recent, steepest, downtrend line was penetrated. You can even see a small gap higher (7/22) as it was penetrated (no coincidence). Gold retraced that gap higher and then looks like it's trying to decide where to go next.
In addition to that sign of strength, you can see on the lower chart that the RSI made a higher high, up to a level not seen since November of 2012. Yes, this is another sign of strength. But as a buyer you have to ask yourself: "Is that enough for me? Or do I need to see more proof of strength?"
Personally, I'd need to see more. Especially because gold is also running up against strong horizontal resistance and diagonal resistance from the next downtrend line.
Now, let's get into the inter-market relationship between the U.S. dollar and gold prices (also, between the dollar and gold miner stocks).
Below you see two charts. The top chart is the U.S. dollar index and the lower chart is Gold. You can see the negative correlation. The U.S. dollar has inverse influence on gold and therefore on gold stocks (which tend to be correlated with gold).
Once again, when you look below you can see the U.S. dollar on the top chart, but this time we put GDX on the bottom. GDX is the Exchange Traded Find that tracks the gold miner stocks. You might ask why I only compare 2013's price action above while I do 2 years of price action below. I am asking myself the same question. No reason. Moving on...
You can see the negative correlation here too. Okay, so we have proven the negative (inverse) correlation. So where is the U.S. dollar about to go?
Understanding what's going on with the U.S. dollar is a big help with understanding gold prices and therefore gold stocks. The U.S. dollar has just bounced off of a key level and seems to want to continue the reversal higher. The advance in the U.S. dollar should lean on gold prices.
Now if the dollar decides to slice through that key support level (around 81) as it has a few times in the past (to the upside or the downside), then it would have a positive impact on gold. But we play the odds here, and it's just more likely to bounce than to slice through. The current trend is always more likely to stay in place -- support levels are support levels until they are not, so we respect them and we MANAGE OUR RISK RESPONSIBLY so if we are on the wrong side of the trade we are not forced to sell the family car.
I don't want to get into the story of "WHY" the dollar would decline or advance, because I don't want to encourage you to try to figure out what Bernanke is going to say next. It's a sucker's game. It makes more sense to trade trends. The odds are better. But you should understand that the dollar advances when there is talk of "tapering" QE and vice versa.
You can see the red circle above and the blue circle below where the OPPOSITE happened. There's a long story behind this, but basically it was a flight from U.S. assets in general. It was an unwind of a bunch of big trades that occurred when Bernanke first talked "tapering" in a significant way on May 22. Just to stay on topic, you're going to have to just trust me on that. What's important to note is the key trading range of 80.5 - 81 was respected and acted as support.
you can see the MACD in the lower part of the chart. I circled one part to focus on where the MACD has not yet put in a buy signal. But it's something to watch because usually when you get a MACD buy signal in the dollar, you see more upside. If the dollar gets back up to the upper end of its trading range (around 84.5) you'll see gold prices testing their old support levels.
So with support in the dollar and resistance in gold I'd say the short-term and intermediate-term buyers are best suited to stay away. I am not a fortune teller. Maybe gold explodes to the upside. But if you want to play the odds that are in your favor, you're staying away from gold here. But you're watching it because it has certainly shown some signs of life lately.
As a long-term investor I'd have to say gold and GDX are at historically oversold levels. The metal is also trading near a historically significant level (red line). Look at the bottom of this 10-year chart and notice there is only one year with WEEKLY RSI buy signals (2013). There's also a weekly MACD buy signal. These are long-term signals.
I'm not ready to count gold out just yet. I know Bernanke has to remove the punch bowl and, yes, that would probably lean on gold prices. But we are not fortune tellers and we don't know what kind of currency crisis may be in the future cards, which could send gold much higher. We just don't know.
In 2008, gold had a 34% correction over about 10 months. It has lost 38% since the summer of 2011 (pre-mini-crash due to U.S. credit rating downgrade). Long-term investors would be looking to enter gold around this level and perhaps some more when GLD gets near $100.00 or when gold gets closer to $1,060.
I hope this helps.
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An internationally respected authority on options, 9-year Wall Street veteran, and co-founder of Institute for Individual Investors, Chris Rowe spun out profitable trades for his Trend Rider members for 7 years, ending with his retirement in 2012. While most professionals consider an options trader who is right on 3 of 10 trades to be very good, Chris was right on the majority of his trades! Now, through his weekly "Technical Tuesday" Tycoon Report articles, Chris Rowe helps hundreds of thousands of investors across the globe, demonstrating the benefits they'll realize by taking a dispassionate, business-like approach to both stock and options trading. In his thorough and detailed, yet easy and accessible courses, you'll learn directly from Chris how incredibly easy it is to consistently make money - in bull markets, bear markets and flat markets - when you use a proven system for trading success. |
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