$GOLD : A Bear Market Rally Or A New Bull Market?
- The all-important trading range
- The short-term trend for Gold
- What’s going on with those Gold shares?
- Hail Silver?
$GOLD has been rallying of late and the question naturally arises as to whether this advance is for real or is a normal bear market counter-cyclical advance. The answer is not easy, as a good case can be made for either side.
The all-important trading range
The short answer, is that $GOLD (Chart 1), has been in a trading range since mid-2013. That means that the best signal of a resolution will be a month-end close above $1360 or one below the lower part of the range at $1060. Note that the KST is very close to a sell signal, but being close and actually going bearish are two different things.
Chart 1
It’s also possible to appreciate the fine technical balance from Chart 2, which compares the $GOLD price to a PPO using the 6/15 parameters. The shaded areas indicate when the indicator is in a negative mode i.e. when the 6-month EMA is below its 15-month counterpart. Usually it gives a clear-cut signal, but the two red arrows point out the two whipsaws that have developed in the last 45 years. It went bearish a couple of months ago, but not decisively so. As a result, the indicator is now marginally in positive territory with a current reading of .092. The crisscrossing of the zero line though, underscores the fine current technical balance.
Chart 2
The short-term trend for $GOLD
When it comes to the short-term trend, the daily KST has been flat for the last couple of months, again indicating an evenly balanced technical situation. The trend though, is still up, as the price of the Spider Gold Trust, the GLD, is above its 2017 up trendline. It’s not plain sailing though, as it tried to rally above the 200-day MA on Monday and failed. Monday’s action formed, what we call, a bearish outside day, since its trading range fully encompassed that of the previous session. In effect, we saw a battle between buyers and sellers in which the buyers initially won. That’s because the price exceeded Friday’s high. However, the day ended with a complete seller victory, as it not only closed on that day’s low, but Friday’s as well. If these patterns work, and that’s usually the case except in really strong markets, they typically put a damper on the next 5-10-sessions. That would be enough perhaps to result in a violation of the red up trendline, but not sufficient enough to signal a downside break below the lower end of the trading range described above.
Chart 3
Chart 4 shows a recent example of an outside bar at work in the GSCI Crude Oil ETN, the OIL. This was a much stronger one than that observed in Monday’s Gold action and has had a dampening effect on the price for the last two-months. Two bullish outside bars are also highlighted. I have labeled these in quotes since one of their extremities does not quite exceed their predecessor, so in a strict sense they are not “outside”. They nevertheless have the characteristics of a battle between buyers and sellers in which the balance ends up in favor of the buyers, and that’s what really counts.
Chart 4
What’s going on with those Gold shares?
Chart 5 compares the performance between the GLD and the Gold Miners ETF, the GDX. It is fairly apparent that both series generally move in tandem. It is when they diverge or jointly trigger buy or sell signals that a message is given. Right now we see a small divergence developing, with the GLD rising to new recovery highs and the GDX failing to do so.
Chart 5
The situation looks even more problematic when we compare the relative performance between these two series in the lower window of Chart 6. As you can see, when the GDX is out-performing the Gold price it usually means that the GLD is rising in an absolute sense and vice versa. Note that the ratio broke out from a reverse head and shoulders in early February, which looked very promising at the time. Since then though, it has been falling sharply as the Gold price has been rising. This type of action is usually a bad sign. That upside breakout in the ratio now looks to be a false one.
Chart 6
Another ratio that reflects confidence in the Gold market is calculated from the relationship between junior gold mining issues to senior ones, the GDXJ versus the GDX. Chart 7 shows that a rising ratio tends to be associated with a bull market in the GDX and vice versa. That makes sense, since it means that investors are bidding up junior golds at a faster pace than the larger mines. It’s when the two series diverge that we are presented with a signal. For example, the 2011 peak was associated with a negative divergence in which the ratio fell as the GDX rose. This suggested that under the surface confidence was eroding. Alternatively, the 2015 low was preceded by the ratio forming a bottom above the one established earlier that year. In this case an improvement in confidence preceded a reversal in the GDX itself.
Recently the ratio touched a new recovery high as it broke above its 2011-2017 resistance trendline. It has since pulled back, which is a normal technical phenomenon. Provided it can remain above the 2016-17 up trendline at 1.50 this indicator should be interpreted as bullish, but a violation of the line would confirm that the upside break was a false one and that would be quite negative for Gold.
Chart 7
Hail Silver?
Finally, Chart 8 shows that the Silver price is closer than Gold to a breakout above its potential 2013-17 inverse head and shoulders neckline. We can see that especially from the third panel which compares the two. First, the ratio has violated its 2011-16 (dashed) down trendline. Secondly it is right at the neckline of a potential reverse head and shoulders formation. Finally, the long-term KST for the ratio is in a bullish mode. I am not saying that there will be an upside breakout, merely that if the ratio betters its July 2016 high of .144 , Silver would be strongly favored to outperform Gold regardless of the price direction of Gold itself.
Chart 8
To conclude:
- The Gold price is confined within a large trading range bounded by $1360 on the upside and $1060 on the downside.
- The recent short-term rally is intact, but showing signs of tiredness. Gold shares are bearing the brunt of the vulnerability.
- We are more likely to see a test of the trading range lows prior to an attempt at the highs.
- If precious metals firm up, silver is likely to outperform Gold.
- We are going to have to wait for more evidence before we can answer the question posed by the title of this article!
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.
