This Sector Bucked Last Friday's Decline and Could Be Ready to Take Off
A couple of weeks ago, I wrote about the fact that the technical position of gold was extremely finely balanced, and that it was "Either in a Hard Place or a Sweet Spot". My conclusion was that its short-term position was improving and that the sweet spot scenario had a better chance of working out. That assumption was based on the fact that both the SPDR Gold Trust (GLD) and the Van Eck Vectors Gold Miners ETF (GDX) had both tentatively broken to the upside. Naturally, both sold off after that, frustrating my expectations and negating the breakout . Friday's strong action though, has once again turned the tables in favor of the bulls. Before I get to that, let's quickly recap why the resolution of this battle is so important.
Chart 1 expresses gold adjusted by the CPI, so that we can easily see whether the yellow metal is acting as a hedge against inflation. The price is trading just below its 12-quarter moving average. That's not an official print, though, because the end of the quarter does not occur until the end of June. In addition, the Coppock Curve, in the bottom window, is just about to cross below its MA. The green shading shows that previous periods when it has been trading above its 8-quarter MA have generally been bullish. A double negative crossover by the price and momentum would imply a bear market, previous examples of which can be observed from the unshaded areas on the chart. Finally, if a sell signal is avoided and gold rallies above the green resistance trendline, it will have experienced a massive upside breakout, with substantial upside potential. Don't forget that's a 40-year resistance trendline. Since gold has a habit of anticipating inflation or disinflation, the eventual outcome will have significant implications for both.
Another reason to watch gold is because it has an indirect effect on the stock market. In that respect, Chart 2 shows that when the long-term KST for the Gold/stock ratio is below its MA favoring gold, stocks are vulnerable. We can't say that it's outright bearish , because there are many periods when equities rally despite the fact that the KST is below its MA. However, it is also a fact that all the major bear moves since the 1990's have developed during periods when gold has outperformed stocks.
The chart shows that the KST has just crossed below its MA again. The implication is the ratio itself will soon confirm the possibility of a false upside breakout by dropping below its red secular up trendline.
Friday's Action
Chart 3 shows that Friday's action represented a bullish outside day, since its trading range not only encompassed Thursday's, but many sessions prior to that. Since the price also closed near its high, there is little doubt that buyers ended the day clearly in control. Note that Friday's action also resulted in a trendline violation for both the price and its RS line. Finally, the price closed decisively above its 200-day MA. Volume also picked up noticeably for the first time since late March.
Volume also picked up for the GDX, but, so far the price remains literally right at its resistance trendline and 200-day MA. Since the RS line has broken out and the price also experienced a bullish outside day, gold shares deserve close monitoring for a possible near-term upside breakout.
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.
