The normal seasonal trend for gold shifts around this time of the year, and this combined with the recent high level of bearish sentiment suggests an important opportunity may be at hand.
Silver prices plunged on June 28. The iShares Silver Trust (SLV) hit a low of $25.34, which was below both the May and, more importantly, the December lows. From a technical standpoint, this was certainly a negative development, and for some gold bulls it was another reason to turn negative.
In early June, my review of market commentary as well as the Commitments of Traders (NYSE:COT) data suggested that sentiment on gold had become quite negative. Since the high last September, it has been my view that we would see a pause in the major uptrend that would last long enough to reverse the very high bullish sentiment.
The corrective period has lasted longer than I expected, but prices have held well above key Fibonacci retracement support levels. This along with the confirmation of the monthly highs in both the Comex gold futures and the SPDR Gold Trust (GLD) by the on-balance volume (OBV) indicates that the major trend is still positive.
The recent rally in gold prices has not gotten much attention, which to me is a positive sign. Gold prices surged Tuesday in anticipation of an ECB rate cut, but the low volume made some skeptical of the rally. The lack of interest in the gold market, along with the strong seasonal pattern for gold, indicates an important opportunity may be at hand.
Chart Analysis: The long-term daily chart of the Comex continuous gold contract shows a flag or triangle formation (lines a and b). This is a typical continuation pattern or pause in the major trend.
- For the August Gold contract, the important support resides in the $1,529 area (line b)
- The 38.2% retracement support, which is calculated from the 2008 lows, sits at $1,443
- The seasonal trend analysis shows that gold prices typically bottom in July-specifically, this week. The downtrend in the seasonal plot (line c) is typically broken on July 11
- From the July lows, gold prices typically rally in mid-September before a sharp pullback into October.
- From the October lows, the seasonal trend (using data that goes back over 30 years) is typically up until February
- The weekly and daily OBV (not shown) are both above their WMA
- Weekly resistance for the August gold futures is now at $1,642, so a close above $1,650 would be quite positive
- The 127.2% Fibonacci retracement target from the flag formation is at $2,035
- The daily chart and the 38.2% retracement resistance stands in the $162 to $163 area. The 50% retracement resistance is at $167.40, with the 61.8% resistance at $171.80
- The daily OBV shows a short-term uptrend (line c), but needs to move through the resistance (line b) to complete the bottom formation
- There is near-term support at $154 to $155, with a more important level at $150.15, which was last week's low. The 20-day EMA is at $154.80
The weekly chart of Newmont Mining (NEM) shows that long-term support (line d) at $43.23 was tested in May. This support goes back to early 2010. NEM made a high of $72.42 in November 2011.
- Though NEM dropped well below the 2011 lows in May, the weekly OBV formed higher lows (line f). This is an encouraging sign, but the OBV is still below its WMA and the downtrend (line e)
- On a close above $49.20, the weekly chart would show a bullish candle formation with key support now at $46.41, which was last week's low
- The 38.2% Fibonacci retracement resistance is at $54.44, with the 50% resistance at $58
- There is short-term support at $48 to $48.30, and then $47
What it Means: Even though the daily and weekly technical studies have not yet confirmed that gold or GLD has bottomed, the evidence is mounting that the lows are in place.
Those who are not long as per my June column, "Are Gold Bulls Throwing in the Towel?" should look for a slight setback to buy.
There are clearly many stops for SPDR Gold Trust (GLD) in the $148 to $148.60 area, so one more drop to clean out the stops cannot be ruled out. It is now looking less likely.
How to Profit: For the iShares Gold Trust (IAU), go 50% long at $15.68 and 50% long at $15.42, with a stop at $14.42 (risk of approx. 7.3%).
For Newmont Mining (NEM), go 50% long at $49.04 and 50% long at $48.20, with a stop at $45.62 (risk of approx. 6.2%).
Portfolio Update: Investors should be 50% long SPDR Gold Trust (GLD) at $152.42 and 50% long at $150.28. Use a stop now at $149.65.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.