GETTING TECHNICAL
Be Cautious About Joining the Gold Band Wagon
By MICHAEL KAHN
At it hits prices not seen since March 2008, there metal's upside may be evaporating.
GOLD BUGS ARE ENJOYING that the yellow metal was above $1,000 per ounce in midday trading Tuesday, to its highest level in the past 17 months. Indeed, given the run-up that started last week, and the heavy volume accompanying it, we have to believe that gold can climb higher.
To be sure, gold is not completely free and clear. True resistance for this market is really in a zone between 1007 and 1032, the latter being the all-time high set in March 2008 (see Chart 1). That's why it might be wise to wait for a pullback before buying into the metal.
C
hart 1Critics will point out that since gold is priced in dollars, the weak greenback is the real cause for the rally. (Gold prices generally move inversely to the value of the greenback.) But one look at a chart gold priced in the basket of currencies making up the dollar index also shows a significant upside breakout (see Chart 2). In other words, gold is rallying in other currencies, too.
Chart 2
Chart 2
Ian McAvity, editor of the Deliberations on World Markets newsletter, said that "gold is rapidly coming back on to the global currency stage, because it is rising against all of the major currencies. The historic role of gold as money, and the only monetary asset with no counterparty risk has been steadily gaining ground over the last few years."
There was another subtle change last week, according to Kevin Schweitzer, a trader with Access Securities. He noted that gold prices moved higher after regular U.S. trading hours on several occasions due to demand from China. On domestic charts, this was evident in "gaps" where prices jumped up at the open of the next trading day.
These gaps have technical significance, too. Since gold was trading in a small range for the previous few weeks, it was as if suddenly the market shifted from uncertainty to conviction in the bullish case.
From another angle, the gold market typically sees seasonal strength until the end of the year. According to the Commodity Trader's Almanac (John Wiley & Sons, 2009), gold tends to post seasonal bottoms in late July to early August as demand increases ahead of the annual wedding season in India, arguably the largest consumer of gold in the world.
With typical seasonal tendencies observed over the decades and new demand from China, we get a well-rounded argument for a rising trend in gold. After working off recent gains, investors should be on the lookout for a move through the 1007-1032 resistance zone as the sign that the market agrees.
For stock market investors, the Market Vectors Gold Miners ETF (Ticker: GDX) has also exploded higher over the past week (see Chart 3). However, after the long weekend it does look as if it got a bit ahead of itself. By jumping up over four percent early Tuesday morning, it pushed short-term technicals, such as momentum, to overbought conditions. That suggests investors need patience before joining in.
There was another subtle change last week, according to Kevin Schweitzer, a trader with Access Securities. He noted that gold prices moved higher after regular U.S. trading hours on several occasions due to demand from China. On domestic charts, this was evident in "gaps" where prices jumped up at the open of the next trading day.
These gaps have technical significance, too. Since gold was trading in a small range for the previous few weeks, it was as if suddenly the market shifted from uncertainty to conviction in the bullish case.
From another angle, the gold market typically sees seasonal strength until the end of the year. According to the Commodity Trader's Almanac (John Wiley & Sons, 2009), gold tends to post seasonal bottoms in late July to early August as demand increases ahead of the annual wedding season in India, arguably the largest consumer of gold in the world.
With typical seasonal tendencies observed over the decades and new demand from China, we get a well-rounded argument for a rising trend in gold. After working off recent gains, investors should be on the lookout for a move through the 1007-1032 resistance zone as the sign that the market agrees.
For stock market investors, the Market Vectors Gold Miners ETF (Ticker: GDX) has also exploded higher over the past week (see Chart 3). However, after the long weekend it does look as if it got a bit ahead of itself. By jumping up over four percent early Tuesday morning, it pushed short-term technicals, such as momentum, to overbought conditions. That suggests investors need patience before joining in.
Chart 3
There are a few individual stocks that seem better-positioned to take advantage of a confirmed gold breakout -- if and when it occurs. Goldcorp (GG) has several technical characteristics that suggest it will be a leader down the road.
Unlike many of its peers, Goldcorp is trading near its 52-week high. (see Chart 4). Even for those who do not believe in the Wall Street mantra of buying high and selling higher, this stock has already overcome last year's slow motion stock market crash. It is a good omen in anyone's book.
Chart 4
Unlike many of its peers, Goldcorp is trading near its 52-week high. (see Chart 4). Even for those who do not believe in the Wall Street mantra of buying high and selling higher, this stock has already overcome last year's slow motion stock market crash. It is a good omen in anyone's book.
Chart 4
Aside from basic momentum and moving average analysis, Goldcorp is also showing good investor demand. More volume has been changing hands on days when prices increase than on days when it decreases and that theoretically signals more aggressive behavior by the bulls than the bears.
Again, a good deal of Tuesday's initial jump up was lost as the day progressed to suggest a need for a rest. However, unless gold fails in a big way, Goldcorp seems to be a good candidate to buy on any short-term weakness.
Just to recap, gold hit its resistance zone of 1007 - 1032 and ran into some trouble. However, last week's explosive action coupled with seasonal tendencies and the China factor round out a good argument that gold bugs should like.
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.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
Again, a good deal of Tuesday's initial jump up was lost as the day progressed to suggest a need for a rest. However, unless gold fails in a big way, Goldcorp seems to be a good candidate to buy on any short-term weakness.
Just to recap, gold hit its resistance zone of 1007 - 1032 and ran into some trouble. However, last week's explosive action coupled with seasonal tendencies and the China factor round out a good argument that gold bugs should like.
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.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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