Those of you who see the long term reasons for owning gold should not be concerned about short term price swings. But in the practical world, we all want to have a sense of where a market is when we buy. Yes, we hold for long term fundamental reasons, but our decisions to buy must necessarily occur at specific times and hence are based on shorter term judgement.
To abbreviate the process, a picture or chart provides loads of data in compressed form. A written chart is better than the “chart” most of us carry in our heads.
This most recent leg up in the gold market began just prior to the election, in mid October. It has been a decent move from a low of $1184 to a recent high around $1350, a move of about 14%.
In some ways, this has been a powerful move for gold because during much of this time the stock market recovered sharply from the December lows and the US dollar has been strong.
It is a bit unusual for gold to be that strong under those conditions. Gold often moves opposite the dollar and the stock market. It could be that large central bank accumulation has been undergirding the market. Another factor was the election shifted the House of Representatives to the Democratic Party, which means political trench warfare and big spending plans.
So where are we right now?
Gold has retraced to the 50 day moving average and a perfect .38 Fibonacci retracement. We won’t spend time explaining Fibonacci numbers but just note that all kinds of markets seem to react to them and many traders watch these levels.
It is common to retrace one third to one half of recent gains. It is also common to retest the 50 day and 200 day moving averages.
So far, this looks like a typical correction. We have retraced about one third of the recent move, tested the low around $1275 we saw in January, and hit the 50 day moving average.
The market could fall a bit further to the 50% retracement or the 200 day moving average. If so, it would still stay comfortably in the uptrend started last October.
The good news is a lot of the correction is now behind us and we are entering the typical zone where markets start to bottom out.
Technical analysts also look at momentum. When a market moves too far too fast, momentum will peak and roll over. This is what gold did as all four of our momentum indicators show.
Gold has now cycled from being “overbought” on a momentum basis to becoming “oversold”. This is another indicator that prices should start to find support soon.
There is no method which allows 100% accuracy in seeing the future. However, technical analysis can give you a sense of where you are in the market cycle and provide areas of both support and over head resistance. Charts can be helpful if you don’t expect perfection from them.
Charts require some interpretation and hence allows for a range of opinions. You can see the range of $1250 to $1270 is still possible. It would appear we have entered the upper range of an expected correction zone.
Given how quickly gold has swung from overbought to oversold, it reduces the odds of seeing the lower end of the trading range.
One thing is clear. It is better to be buying gold in the $1250-$1270 range than the $1350 range. That remains overhead resistance on the long term chart.
Major long term overhead resistance exists right around the $1350- $1370 area. Breaking through this would be a quadruple top break out and likely signal that gold will enter a much more dynamic phase in its price action. If and when this happens, we suspect gold will get a lot more attention than at present.
The irony is of course, we are supposed to buy dips when the market provides them.
All charts courtesy of Stockcharts. com. The opinions expressed are based on available information and cannot be guaranteed.