The market internals were weak Wednesday, especially notable was the negative A/D ratios in the Nasdaq Composite though it actually closed higher. The McClellan oscillator has confirmed a new short-term downtrend and could drop below the zero line with a lower close Thursday. The stock index futures are showing significant losses in early trading despite Facebook's (FB) stellar earnings.
Monday's $39 rally in the gold futures had some gold bulls out of the closet while skeptics warned that rumors of a gold shortage were part of a global conspiracy. Gold lost $14 on Wednesday, which accompanied a $2 drop in crude oil.
Given the high level of bearish sentiment for the precious metals, is now the time to buy or is this just another bull trap?
Chart Analysis: The weekly chart of the Comex Gold futures has a typical seasonal tendency as demonstrated using the Seasonal Trend feature from Trade Navigator.
- This analysis shows a top in gold around January 18 while the analysis of seasonal experts like John Person indicates a top in February.
- The chart shows a typical bottom for gold on July 5 but many experts look for a bottom in late July or even early August.
- One, of course, has to remember that these are tendencies, and before you act, the technical studies need to agree.
- Last year gold formed a multiple bottom in the May-June period, and the technical studies were in agreement by early July of 2012.
The monthly chart of the gold futures (updated through 7/25) indicates that we should close the month above the June close of $1274.
- The 61.8% Fibonacci retracement support from the 2008 low at $1179 was broken in June but not on a weekly or daily closing basis.
- The weekly OBV (not shown) violated its WMA in October of 2012.
- The monthly OBV dropped below its WMA at the end of November of 2012, so the multiple OBV analysis was negative with gold's close at $1720.
- The uptrend in the OBV, line a, was broken at the end of January.
- The monthly OBV made new lows in June as did the weekly OBV (not shown).
- The weekly and daily OBV (not shown) have moved back above their WMAs after confirming the price lows.
- The insert shows that the rally from the 7/5 lows was exactly equal to 1.618 times the rally from the 6/28 low to the 7/2 high.
Click to Enlarge
- The resistance from the April and May lows, line b, has been tested.
- Tuesday's high at $130.14 was just above the quarterly pivot at $129.89.
- The more important 38.2% Fibonacci retracement resistance is at $137.43.
- The 50% resistance level is at $144.43 with the downtrend, line a, at $147.43.
- The rising 20-day EMA is at $125.24 and a close below $122.70 will indicate the rally is over.
- The daily OBV has moved above its WMA but shows a pattern of lower lows, line d.
- The OBV is still well below the downtrend from last September, line c.
- More importantly, the weekly OBV is still well below its declining WMA
- GLD is currently up just over 11% from the June lows.
The Market Vectors Gold Miners (GDX) is up over 21% from its June lows as it has reached the resistance from April and May.
- The chart shows converging resistance in the $29.50-$30 area, lines e and f.
- The 38.2% retracement resistance is just below $35.
- GDX reversed to the downside Wednesday after testing its daily starc+ bands. It is still above its declining 50-day SMA.
- There is next support in the $26 area with the 20-day EMA at $25.43.
- A daily close below $24.70 would be the first sign that the rally was over.
- There is additional support at $23.65 with the June low at $22.21.
- The daily on-balance volume (OBV) shows a well-defined downward trading channel as it made significant new lows on June 26, line h.
- The OBV is back above its WMA but is still below the downtrend, line g.
- There was a large up volume spike on June 28, which was a positive sign
What it Means: In my opinion, the daily and weekly technical readings suggest that gold has not completed a bottom yet. At a minimum, I would expect to see at least one more drop to or below the June lows before a bottom is completed. Going back to 2004, GLD has not begun a significant new uptrend when its weekly OBV was below its declining WMA.
Even if my analysis is wrong, the risk is too high in buying GLD at current levels of $127.48 as a stop under the June lows of $114.68 would be a risk of 10%, which is too high. It is a good example why risk analysis so important.
Those who bought near the lows have a different risk profile, but I would suggest taking some profits at current levels. To improve the outlook, GLD would need to close above $138.
How to Profit: No new recommendation
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.