Positive momentum divergences signal potential for gold

January 19, 202212 Comments

Gold is a well known hedge against a declining USD. It can also be a non-correlated asset to the market.  Not negatively correlated. Non-correlated. Please see my recent Technical Analysis course – to understand the difference.  As such, gold isn’t such a bad thing if you are a bit worried about potential stock volatility. Finally, it is a commodity – thus may have some inflation hedging properties. However, because gold is less of an industrial material, its actually not quite as effective as an inflation hedge as some believe. Whatever the case, I’ve noted some potential positives in the gold chart below for those who wish to consider holding it as a diversification factor based on all of the above factors.

“There’s a bigger buy-in this time to the idea that prices never decline, and that all you have do is buy, than there has ever been. When the decline comes, it will perhaps be bigger and better than anything previously in US history.” Jeremey Grantham

 

The chart below is a busy one. I tend to keep my historic drawings on charts so I can eyeball old support resistance lines, and note my thoughts on an historical basis to keep myself in check. Today, I want you to stricly focus on the right hand side of the gold chart below. There you will see a few things:

  • After a parabolic rise and overbought signal in early 2020, gold declined and entered into a consolidation pattern.
  • Despite the declining peaks and flat bottom of this right-angled triangular consolidation, we might note the rising momentum indicators.
  • All three time frames (short, medium and longer termed) oscillators are diverging bullishly. Note my red arrows on the indicators.

 

 

Below is the Equity clock seasonal gold performance in relationship to the S&P 500. As you can see, we have entered into a period of traditional outperformance by gold. This chart is a relative score, not an absolute return score, so keep that in mind. If the SPX goes down, gold might go down less. Visa versa if the SPX goes up. Gold might go up more. Nothing prevents gold from moving higher after the March peak-performance date. Again, this is a relative study.

Conclusion

Gold has an encouraging technical profile right now, although it needs to break out of the triangle noted above to confirm a bullish move. Meanwhile, seasonals are certainly encouraging. And, then there’s that stock market volatility of late….

Food for thought as a diversification potential for a portfolio.

 

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12 Comments

    • Yes, you are correct Russ–somewhere above $1900 suggests a breakout from the triangle– first upside objective into $2000 first, then no overhead resistance beyond that

      Reply
  • The S&P 500 closed below 4600 2 days in a row. This moved through the support channel. If it closes one more day (your 3 day rule) below 4600 does this suggest that you would expect it to test the 4400 support level?
    Thanks

    Reply
    • Yes, and BTW the 4400 target comes from physical support near there and the 200 day SMA which is around 4450. So my target is 4400-or thereabouts.

      Reply
      • I was just looking at the S&P charts and I think the support is 4300. That was the low Sept 30ish which it then turned upwards to rise to near 4800. I suspect you are correct but why would that lowest point not be the support #? Thanks

        Reply
        • You are correct in that price support comes in somewhere near 4350. But the 200 day SMA support comes in 4450. Split the difference, the market should decline to somewhere near 4400. If it falls 50 points below that to 4350, or if it stops at the 200 day near 4450 – this is an issue of about 1% on either side of 4400.
          As you probably know – I tend to get less tied up in identifying the precise targets–I often use the words “about” or “ish” –that’s because the market will land somewhere near the target, but rarely do any of us have the foresight to be too precise.
          Hope that helps!

          Reply
  • I think this is Keith’s way of saying “table-pounding buy!”
    PS – Congrats on creating the course. I look forward to it.

    Reply
    • Thanks Leon–not quite table pounding buy until gold breaks out of the triangle–but it is certainly setting up for a leg-into it (see my course to see how I leg into positions)

      Reply
  • The s&p on the weekly is along way above its 200 weekly moving average. This could be an ugly correction.

    Reply
    • I’m prepared with cash–hope you are too. This will be a very good opportunity.

      Reply

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