GETTING TECHNICAL
Gold's Next Leg Up is $1,350 an Ounce
By MICHAEL KAHN
The recent sell-off is a consequence of too many investors getting too bullish at once. Once the excesses are cleared, the metal can hit new highs.
GOLD CRESTED ATOP $,1227 per ounce last week before falling back hard. Suddenly, momentum lovers got a taste of market reality.
What goes up on momentum can comes down just as hard.
To be sure, the long-term bull market in gold is still very much intact and my next major upside target is $1,350 an ounce - revised from the $1,300 as offered in this column two months ago (see Getting Technical, "Gold Has More Upside", October 7).
But in the short-term, the gold trade was very crowded and its pace was on an ever accelerating slope. Its look becomes similar to one side of a parabola, a shape perplexing geometry students everywhere.
Such parabolic moves up are often followed by a similar parabolic move back down and we only have to look at the March-May 2006 run-up in the yellow metal for precedent here. Gold ran from roughly 560 to 730 in nine weeks before coming all the way back down in only five weeks.
A similar retracement now would bring the yellow metal down to $1,000 an ounce where very strong support lies. Personally, I don't think it will get that low as many a gold bug will be drooling over the second chance to buy into this long-term bull.
Impatient investors will likely hop back into this market well above chart support, thinking that it will shoot higher without them if they don't.
On the charts, last week's action in the SPDR gold trust exchange traded fund (ticker GLD) was very bearish for the short-term (see Chart 1). In technical parlance, the ETF gapped down on nearly five times average volume.
Chart 1
Gaps are simply price zones on the chart that have no trades. Selling pressure was so great that prices had to jump down as the market opened to find an initial equilibrium between buyers and sellers. As such, they are usually powerful indicators.
On longer-term charts, the decline also left a large weekly reversal bar. By trading to a new high and then collapsing to a net loss for the week, we can surmise that investor attitudes changed for the worse in a big way.
Similar to gold itself, the ETF should find strong support at 99-100. Again, I am skeptical it will get quite this low as early gold bugs take action.
Moving away from gold and toward gold stocks, the Market Vectors Gold Miners ETF (GDX) also scored a very dramatic, and bearish, reversal last week. However, unlike gold itself, the gold stocks ETF stopped just short of major resistance from its March 2008 all-time high (see Chart 2). Given that the ETF more than tripled since its October 2008 low, the 2% miss was close enough to say that the market indeed hit resistance before turning lower.
Chart 2
Support here is quite strong at 43, roughly 13% below Monday's trading. This was a price level that stopped rallies in 2006 and 2007 and then supported declines in early 2008.
In the silver market, the white metal also rallied sharply before last week's sell-off. The iShares silver trust ETF (SLV) ran into resistance of its own last week as it touched 19.11, a price not seen since the major peak of July 2008 (see Chart 3).
Chart 3
Support is quite strong at 15.80 where short-term turns both higher and lower took place over the past year and a half. Further, the bull market trendline from October 2008 will be rising to this level over the next few weeks to add to its strength.
Even though precious metals and their related stocks are influenced by moves in the dollar, their recent run-ups and declines were based on other factors, such as sentiment and momentum. If we price gold in euros, for example, we would still see the same steep rise and fall. Therefore, while the currency influences are important, changes in the prices of gold and silver are happening anyway.
I consider the current smack down to be a necessary consequence of too many investors getting too bullish at the same time. Once the excesses are cleared, the bull market can resume.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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