Two trends are colliding in Gold and Oil. There are Macro Uptrends in place, but also Intermediate Downtrends. Which one will eventually prevail? Is this the start of a bigger correction, or just a bump in the longer road higher?
Everyone likes to give a thesis for why and what moves commodities. The fear trade, expectations for more QE, etc. As technical traders, we are less focused on the reasons why commodities move, and more intent on examining the price action to forecast the next move.
Back in 2008, I made a big call on CNBC: I told Mark Haines and Erin Burnett to watch Gold for a macro move higher based on a technical inverse head and shoulders set-up. At the time Gold was trading around $850/ounce. I told them, much to their dismay, that I see gold going to $1,500/ounce over the next few years and gave a tier system on how to play it. Mark called it "My Bold Call".
In the same segment, I also mentioned that you can buy oil tactically and for long-term when it was about $40ish. The links to both are below:
Full segment downloads:
CNBC Dec 18, 2008
While we are once again talking about Gold and Oil, now is not the time for a bold directional call. Both commodities are stuck in intermediate-term patterns and look poised for a move, but the direction is still unclear. That is why we use technical levels and indicators to tell us where the pattern where break.
Gold is even perhaps the purest trade to use technical analysis on a long-term basis, because it's priced is based ENTIRELY on supply and demand. GLD has no earnings, the price of the commodity is based completely on perception.
GLD is the vehicle we use to trade gold so I will use that chart. Many pundits have continue to give reasons why you must own gold: global "money printing", the collapse of fiat currencies, and, as always, the fear trade. However, despite hype over possible QE3 and other monetary policy measures by World Central Banks, they have not come to fruition and gold has been a sell on all of these major announcements.
It's always good to look at sell signals in order to book profits and stay safe. This way you can sell strength to get good prices vs. hitting it out at the lows, like the typical "herd" market participant does. You never want to sell weakness and chase excitement.
During the late state parabolic run of last Summer, prudent traders went on alert that the decade long run could be getting close to (at least a temporary) end. Professionals sell into excitement and then wait for markets to give you a definitive topping signal. You never chase Parabolic moves. GLD went from $150 to $185 in the last squeeze, or the "exuberance phase", usually signals a top is near. After a Parabolic move you watch closely for that topping signal.
On September 9th you had Sell Signal #1: A Major outside day, which technically is very bearish. It traded above the decade highs and closed below, giving reason to sell/reduce longs, or to short the stock if you are an aggressive trader.
Sell Signal #2 came on February 29th (Fed Day) when you had a major outside day that engulfed a month's worth of action. This intensified the intermediate correction/trend to the downside, and also broke the macro accelerated trend. Since then traders have been rewarded for shorting that trend each time it has been tested this year!
Gold is now near a macro inflection point that needs to be respected. The Macro Uptrend is being tested as it conflicts with an Intermediate Downtrend.
Right now, macro holders of gold must watch the $148.20-148.50 area ($1,525-1,530 in gold itself). If gold breaks and closes below this level, there is no support in GLD down to $140 ($1,430-1,450). Below that next support is $123-124 ($1,250-1,260)
As the pattern tightens, gold will get to that major inflection point soon. The Bullish camp will look to see if gold can change its recent character. For that to happen, $148.30-148.50 must hold, and the intermediate trend needs to break. Traders can enter the long side only if we get a clean break and close above $157-159.50. We need a major igniting bar to trigger that bigger move to the upside.
Oil has been under pressure most of this year thanks to slowing economic growth and a strong dollar. As economic reports continue to deteriorate, we have seen oil accelerate to the downside.
Technically, oil was a sell when it broke $101-102, and it's been a straight line down to the $81 area with no bounces. Oil related names, especially the OIH, have been super weak during this process.
Last week oil broke below the recent Pivot of $81, a perfect Bear Flag continuation breakdown. It hit as low as $77.56. Macro support sits at $74.95, a spot that typically will hold the first time it gets there. If it can't reclaim and get back above the $81 level quickly, or whether $85 serves as new resistance. If it sees $74.95 and breaks it, oil's next major macro support is in the low 60s.
You don't want to be the trader/investor selling bottoms and chasing tops. If you sold longs correctly when the trend broke at $101-102, this last downside move can be opportunity to "try out" longs vs. $74.95 instead of getting forced out.
Sometimes you break the last level so late buyers capitulate out. We need to see if it's a trap to get the last shorts in and or weak longs out. If this was a normal environment, below $80 would seem "buyable", but we are still trying to figure out how Europe and the Global slowdown plays out. This is why you have to expect the unexpected and if $74.95 gives out. Oil can see next major level down in the low 60s.
At some point hopefully the lower crude prices will be passed on the consumer with lower gas prices, but we have yet to see that. Lower commodity prices can be bad for commodity stocks, but ultimately good for the consumer. When we hit some extreme low prices perhaps it will have some benefit. Right now the glass is being viewed as half empty vs. half full, and I'm a glass half full type of guy!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.