Gold is now reaching long term trend support after falling the last few weeks as investors returned to bid up the Euro and equities. The bounce in equities, especially financial, retail and real estate may be short lived as volume indicates that there is not much conviction from major investors on the upside. Gold has recently been the safe haven as investors sought shelter away from the Euro when it was having the sovereign debt issues. Now that those issues have been quelled, gold has had some selling and it has now reached an oversold condition and a long term trendline which is acting as major support.
Stock prices move in trends. In a bull market, it is quite often easy to identify the ascending bottoms. Being familiar with trendlines allows the investor to enter long term bull markets when they are oversold and at key support. An investor must always be aware of a stock’s underlying long term trend. This can be counter-intuitive and awkward, as most times when it comes down to support you have to think against the market herd and buy when others are selling. It’s like buying a winter coat in the heat of summer. Gold is on sale, and presenting a low risk, high reward trade, but it requires non conformity with the crowd which is not an easy task for anyone. Many of us like to be in what’s hot now situations, rather than seeing the bigger picture and entering into a trade when it is uncomfortable.
Gold is now at my buy point of the rising long term trend support line. GLD touched that line 6 times, which signifies that this trendline is a reliable point of support. The significance of this line is that it is not steep, which also brings a higher probability that GLD will find support here. It is also oversold. Continued weakness here and a break below this long term trend would be troubling and highly unlikely. If there is a break most likely it would be exhaustive, meaning that it will shake out a lot of shares before the next move higher. I do not see $1200 as a top in gold as there are no technical signs of a major top.
On the other hand, financial stocks may be finding key resistance here following a low volume rally. As investors are digesting earnings reports that claim credit is improving and lending is increasing, consumer confidence is weakening and the unemployment rate is still very high. A jobless recovery is what many are considering we are experiencing. It seems that this recovery has been good for wall street while main street has not seen an improvement. The financials have found resistance at the 200 day moving average and have now failed four times, significantly breaking through this point of resistance. Historically speaking, after a few failed rallies a major drop could occur.
At the writing of this article, housing has also had a significant reversal after recent data showing an increase in pricing in some metropolitan areas. Investors are selling home building stocks on positive news, which indicates that there is some caution over what the real estate market will resemble after the home buyer tax credit expires. The chart shows a clear reversal and I expect that the rally in equities will be coming to an end and that gold’s poor summer performance will be different this fall as many weak hands were shaken out. An explosive fall rally into new highs is expected as I still have a target of $1400 by year end.
Disclosure: I own shares in gold and silver mining stocks.
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Gold Breaking Out Vs. Euro, Relative Strength Chart Shows Trend Change
In Market Analysis on August 12, 2010 at 3:04 amGet a FREE 30-Day Trial of my Members-Only Premium Stock Analysis Service NOW!
The trade deficit widened unexpectedly this month after the dollar reached extremely oversold levels, which was quite surprising to Wall Street. Usually, a weaker dollar should lead to an increase of exports of U.S. goods; however, the exact opposite occurred. This further signifies the global economic slow down despite record government stimulus, a devalued dollar and artificially induced low interest rates. The market and the employment situation are no better off now than they were previously.
Despite Washington’s attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a collapse of the markets into new lows. Yesterday, as predicted, the House created a $26 billion job bill that will supposedly prevent government layoffs and expand the job market for government workers. Washington is trying to alleviate high unemployment by creating more government jobs. That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary Census workers and did not accurately reflect the true numbers of unemployed Americans.
Investors believe that sustainable job creation is through small business growth. The markets, as well as the American people are looking for leaders who will cut government spending and institute tax cuts for small business owners. Entrepreneurs who are trying to innovate and meet consumers’ demands in a struggling economy should be supported with meaningful tax breaks. This spurs authentic growth and innovation. I expect the market and the American People to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama’s approval ratings dropping to their lowest point in his entire tenure.
The Fed has committed to buying long term treasuries, which would artificially keep interest rates low. They are desperate to get capital flowing again, but it comes at a cost. Eventually, markets move back to their former equilibrium and long term trends. If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long term treasuries will crash. Right now investors are flocking to treasuries for security and safety. However, just as the market is losing faith in the Fed’s handle on the economic situation, bond holders will ultimately lose faith in government bonds. We may see a drop in treasury prices along with continued high interest rates over the next several years and possibly even decades as our children and grandchildren face the burden of credit downgrades.
My fear of a devalued currency and lack of confidence in Obama’s handling of the economic situation are the reasons I am bullish on specific mining exploration stocks that are converting their strong cash positions into high grade copper, silver and gold resources. I have been following this sector for over nine years. I gather that during the next five to ten years, precious metals will see a lot of growth as investors seek hard money and hard assets.
Today’s major collapse in the equity market was significant. Last week, I mentioned that the dollar was extremely oversold and that the Euro and U.S. equities were about to correct considerably. Today we are seeing the beginning of a new downwards trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and a huge trade deficit.
Yesterday’s weakness in gold was only relative to the dollar and U.S. treasuries. Compared with the Euro, there are technical signs of a major move upward in the price of gold. We could see a resumption of the market patterns that we saw in April and May when gold and the dollar rallied together as investors were seeking shelter from government defaults and sovereign debt crises. The relative strength trend of gold versus the Euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.
Although Gold was down slightly to the dollar it gapped up today versus the Euro after reaching an important 38.2% Fibbonaci Retracement and Long Term Trend Support. MACD supports that Momentum has shifted. RSI Crossed 50 today also a bullish sign.
Disclosure: Long Gold and Silver Mining Stocks