Gold's steady decline from early October to a six-month low has many analysts wondering if the long bull market is over, as MoneyShow’s Tom Aspray takes a technical look to see if now is a good time to buy.
It was another choppy day in the stock market as the S&P 500 was down over 12 points in early trading, but closed down less than one point. As I said, after Tuesday’s strong performance, we needed a strong up day to shift the trend in favor of the bulls, but we did not get it even though the A/D numbers were positive.
As this is the last trading day of the month, we may have to wait until next week before we get over the choppy trading that is often typical in the month of March. I would take a day of quite negative A/D numbers to provide the first warning that the market was in the process of building a top. Two consecutive higher closes would clearly shift the focus on the upside.
It has also been a fairly choppy month for gold prices as the futures closed up 10 days and down eight but gold looks ready to close up over $20 for the month. As I mentioned in early March in The Wild World of Gold & Silver, the technical outlook, then, did not favor any new positions in gold or silver.
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The typical seasonal pattern is for gold to top in February and form a significant low during the summer months. The table of the monthly spot gold performance from Bloomberg shows that April is typically a fairly good month for gold prices.
April is not as strong as what typically occurs during August, September, and November. This year, the technical outlook as we head into April suggests that a higher close could reverse the decline that has been in effect since the September 2012 highs. A look at the monthly, weekly, and daily technical studies will illustrate why April’s performance may be critical.
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Chart Analysis: The monthly chart of the Comex gold futures shows that after declining for the past five months, prices are ready to close higher in March. For the June contract, the key level is the February close at $1580.50.
- The blue arrows on the monthly chart show what happened in April over the past four years.
- April 2011 was the best as gold closed up over $130 per ounce.
- The monthly chart shows a flag formation (lines a and b) that has been forming over the past 19 months.
- Prices came close in March to the key support, line b, at $1526.
- The monthly OBV did not form any divergences at the September 2011 highs.
- The monthly OBV has turned up this month after testing the uptrend, line d, that goes back to the 2007 low.
- The OBV is still well below its declining WMA and needs to overcome the resistance at line c, to confirm that the triangle formation has been completed.
- Monthly resistance now at $1687.
The weekly chart of the Spyder Gold Trust (GLD) more clearly shows the sharp decline in February when prices gapped lower.
- The flag or triangle formation evident on all time frame charts is consistent with continuation pattern, not a top.
- The declining 20-week EMA is at $158.57, which is the first hurdle with further resistance at $164.40.
- The weekly OBV is just barely above its WMA as volume has been light this week.
- A strong weekly close next week on good volume would be a positive sign but there is important OBV support at line h.
- On a break below the February low at $150.84, the next support is at $148.37, line f.
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The daily chart of the Spyder Gold Trust (GLD) shows that the daily starc- band was exceeded at the February lows as the support going back to July 2012, line c, was tested.
- There is short-term resistance now at $156.47-$156.80, line b.
- The daily downtrend is now at $159.43 with a band of resistance at $160.40-$164.40.
- The daily on-balance volume (OBV) moved above its WMA in mid-March and tested its downtrend, line d.
- A strong move above its downtrend would be a positive sign.
- There is minor support now at $154.30-$154.80 with stronger at $153.50.
What it Means: The decline in gold from the September highs took many of the gold bulls out of the market and significantly reduced the long term bullish sentiment. The Market Vectors Gold Miners (GDX) still looks very weak technically and the fundamental outlook for the miners right now is also not that great.
For aggressive investors, I think an initial long position in the Spyder Gold Trust (GLD) is now warranted on a risk/reward basis with a stop 0.05% below the recent low of $150.84. If a daily bottom is confirmed, I will look to add to the position.
How to Profit: Aggressive investors, go 50% long at $154.82-$154.40 with a stop at $149.90 (risk of approx 3.2%).
