Has $GOLD Got What It Takes For A Major Rally?

• The longer-term indicators very finely balanced
• The Gold/dollar ratio may be providing some leadership
• Gold shares may have something to say in the matter

The longer-term indicators very finely balanced

The price of Gold has been in a trading range since late 2013, and has traded even more narrowly since the start of the year. As a consequence, the long-term KST has almost been flat for quite a while. Several periods of similar characteristics have been flagged on the chart. All, when confirmed by a breakout in the price, were followed by an important trend reversal.

Chart 1

Chart 2 compares the Gold price to a PPO that relates a 6-month to a 15-month EMA. The shaded areas tell us when the shorter-term EMA is below the longer-term series. Such periods were associated  with some clearly defined bear trends. The two red arrows and the green one point up false signals. Three whipsaws in over 40-years of data is not bad. Right now, this model is bullish because the 6-month EMA is above the 15-month series. Even so, the oscillator is still close to zero. That also underscores the very finely balanced current picture.

Chart 2

Chart 3 drills down to the weekly picture, where the trading range nature of the last few years really comes into focus. Obviously, a break above the thick green resistance trendline would be very bullish, since it would indicate that the last few years of price action is really a giant launching pad for higher prices, but can the price get there?

The first point, is that the red line marks the neckline of a small head and shoulders top. That line, along with the 65-week EMA, was breeched earlier in the summer, but the break did not manage to hold. At this juncture, it looks like a false move, which makes the evidence neutral. A negative for the break, followed by a positive for the pull-back. What we really need is some confirmation. Put another way, some additional bullish evidence that tips the balance in favor of a whipsaw scenario. I think that would come with a Friday close above the thinner green line, as it could turn out to be the neckline of an inverse head and shoulders formation. Monday’s close saw the price right at the line, but remember this chart is based on Friday, not Monday closes. If the pattern is completed the blue arrows tell us that a break above the thick green line is doable as the indicated objective is $140. Another positive factor lies in the knowledge that whipsaw breaks are often followed by above average moves in the opposite direction to the false signal. That’s because the false break attracts shorts, who are forced to cover, once it is apparent that the price is no longer likely to go down.

Chart 3

Chart 4 suggests that any upside break in Gold may be delayed, as the 9-day RSI is currently in an overbought condition. Recent overstretched readings in 2017 have all been followed by some form of price digestion, both small and large.

Chart 4

The Gold/Dollar ratio may be providing some leadership

Chart 5 compares the Gold price to that of a ratio between Gold and the Dollar Index. Most of the time they move in concert, but when they diverge a clue as to the direction of the next gold move is given. In late 2014, when the trend was down, this was signaled by the gold/dollar relationship failing to confirm the January high. More recently, gold failed to confirm a new high in the ratio and in July did not confirm a new low. Right now we see the ratio breaking out, to the upside. Gold may or may not follow suit, but if anything I would rather have the ratio on my side than not.

Chart 5

Gold shares may have something to say in the matter

The progress of Gold and Gold shares are very closely interwoven, far more than say, copper to copper shares or energy to the oil price. In that respect, Chart 6 compares the gold price to a ratio between them. As you can appreciate, when it is possible to construct trendlines for these series joint breaks can result in strong signals. Right now, the ratio is caught between two converging trendlines, just like the price. However, the KST for the ratio, in the bottom window, has just started to go bullish i.e. favoring the shares. That suggests that a break above the green down trendline and the 200-day MA may be in the offing. The two red ellipses point up that very tight trading ranges, when resolved, are often followed by sharp moves. We do not yet know the direction of any breakout from the current tight range. If it is to the upside, I would expect the price to quickly catch up with the bullish action of the gold/dollar relationship in Chart 5.

Chart 6

Two other charts suggest that an important move in the gold shares may be on the way. Chart 7 shows that the bullish percent of gold shares has reached an oversold level and started to bounce. If this is still a bear market that won’t mean very much. That’s because action in the pink shaded area tells us that it is normal for the indicator to reach a more extreme reading when the primary trend is negative. However, if the shares are in a bull market, this probably is the bottom. The current low reading is offering plenty of upside potential before it becomes overbought again.

Chart 7

Our final chart compares the GDX to an advance decline line constructed from gold shares. The last time we saw a double trendline break, the violation was followed by a major down move. A joint break above the two green resistance lines has not yet taken place, but it would certainly not take much to engineer one. Remember, you can update any of the charts in this article by simply clicking on them.

Chart 8

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.