Gold: hold, fold, or go in bold

December 5, 20186 Comments

Gold looks to be staging a minor rally. Is it worth a trade? Perhaps.

Before analysing the prospects of trading gold – I thought I would re-visit a chart that I have posted before. Red line is the S&P 500, black line is gold.  It’s a correlation study on gold vs. the S&P 500 going back to 1990. Let’s call the period since 1990 “modern markets”. You see, some people think that gold is a hedge against a falling market. Were that the case, you would see a strong negative correlation (line on the bottom pane of the chart below would be near the bottom of the pane) whenever markets fell.. Clearly that has not been the case. Yes, there was a good negative correlation in the 2000-2002 market crash, but that correlation did not re-occur during the 2008 crash. Thus, I would not call gold a reliable hedge against aggressively falling markets—at least for the past 30 years.

Now that we can put that myth aside, let’s get on with the show. Is gold a good trade at this moment, given its recent rally? Let’s look at a weekly chart going back to 2012 to try and answer that question.

The top and bottom panes of the gold chart are moneyflow indicators. The bottom pane is cumulative moneyflow – and it’s starting to show a wee bit of life. That could be good. The top pane is moneyflow momentum. It was oversold and is moving up. That can be good, too. The negative here is that moneyflow was not so deeply oversold, as it was in early 2017. That’s when we got a much bigger move, rather than a small rally.

Next, we should take a look at the chart itself. As you will see on the far right side of the chart, there was a bit of a double bottom recently, Gold has rallied into a neckline resistance point at around 1240-ish. It needs to break this level with conviction. If that happens, you will note the target of 1360 (horizontal red dashed line). But that really hasn’t happened yet.

Stochastics (the super fast/whippy momentum indicator) is just approaching overbought levels, indicating it might take a breather sooner or later. But RSI and MACD (mid and longer termed indicators) are positive. Soooo….there is a chance we’ll see said breakout of 1240 (it is actually 1243 as I write on Tuesday after-hours). My official definition of the breakout would be 3+ days holding over 1240. So, another 2-3 days might suggest a fair bet on the upside.

 

Conclusion

All in, I’d say there is a decent chance for a trade on gold. It might not make it to 1360. But, it might just give a good run at it. For aggressive traders, it might be worth a shot if we get a bit more follow-through in the coming days.

6 Comments

  • I recently took a half position in the XGD. At what point would you consider it a buy?

    Reply
    • Gotta say Dave that I have been avoiding producers (energy or gold) of late–they do NOT pattern in line with the commodity. So I don’t like the XGD chart so much, sorry to say. I will say that a pure gold play (GLD, etc) is getting more and more tempting–we are officially through the neckline I mention on the blog–another day brings it to 3+ days–probably approaching that favorable risk/reward buy point in the next day or so if it holds….

      Reply
  • Just curious Keith why is it that you dislike XGD chart. Since Sept the price has been making higher lows. There were two reverse head and shoulder patterns (the latest one being just completed). The uptrend is complemented by higher volumes while 50 MA is closing in on 200 MA. Additionally, producers benefit really well from the underlying appreciating of gold prices. Producers generate economic profit, but you can’t say the same about physical metal.

    Reply
    • Jerry–this is a good question. I’m a mid termed investor. As such, I look for patterns worthy of a play that might last at least a couple of months–preferably 6 months or so.
      The daily chart on XGD shows s/t resistance at about $10. And it has been making progress–attractive if it blows through $10 for sure…. So it might be a short termed trade especially on a break of $10. But the weekly shows that the ETF is still in a dominant downtrend since 2016. The lower lows and highs are unattractive–it would need to take $12 out before that trend is potentially over. That is a long way from here …20%+
      So, yes, it might be a decent short termed trade given a possible breakout might take it to or near $12. But the bigger picture is not the chart I like to buy, and at this time it is not breaking $10 even for a short termed trade.
      Hope that answers your question.

      Reply
  • Keith, I understand your point of view in your response to Jerry. But what a difference a day can make! On the daily chart of XGD.TO, the long upper tail touched 11.23 yesterday and today is an inside day but held 10.92, which is the 200EMA. The SCTR line on Stockcharts has taken off, today ~ 83, and the ADX is rising from a low level with +DI above –DI.
    I know that you have two more recent posts on this blog since this one on gold, so I don’t know if get notified of a comment on older posts. If I don’t see a response to this post, I will try reposting it in your most recent post. Thanks!

    Reply
    • Paula–like I said, if XGD can go through $10 and hold a few days the picture changes. It may indeed be changing–give it a day or two more….

      Reply

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