Published February 24, 2017
Gold, silver, and commodities generally have been trending higher for the past three months. Rather than ponder the reasons why, we are going to focus on whether buying gold is a good choice right now from a technical perspective. We will look at the gold trade from a couple of different time frame perspectives. First, we have a daily chart – Chart 1 – covering almost a year’s worth of price data showing gold looking to have broken out past the declining 100 day moving average line (the thick one) and headed higher. Note that the black line has served as a pretty good reference point meaning if we buy when price is above and sell when it’s below, we generally do ok. Based on this chart, we would be gold buyers as the trend is clearly higher and it appears that we have nothing but daylight ahead of us.
Chart 1 – Gold breaks upward to continue its trend
Same data presented from another perspective makes us think differently, or at least pause in our enthusiasm. Chart 2 shows about two and a half years of weekly price data. We can see the recent uptrend in gold. However, here we have drawn a 40 week moving average line (about 200 days compared to the 100 day moving average line used above). We have also somewhat arbitrarily drawn a horizontal line at $120 for the security. By coincidence, the 40 week moving average and the $120 price line are almost identical. Together, they visually give us a somewhat ominous appearance of overhead resistance for GLD. The chart leads us to believe that if GLD breaks solidly above $120 THEN it will really be smooth sailing for GLD. Until that happens, however, we are operating in an area (below the thick line) that in the past has served as an upper limit for price. From mid-2014 throughout 2015 the price of GLD would rise to the downward sloping line only to fail to rise above it for any length of time. So now, we are there again, with price rising to challenge this downward sloping line. Will it be able to rise above it this time?
Chart 2 – Gold capped by stiff resistance at 120
Traders ultimately adopt their own unique approach to using their charts. The key is to be consistent and disciplined and not bounce all over the place with what you use. Refine, sure, but try to minimize the “adopt, use, abandon, re-adopt, abandon” mentality that dooms many people who try to make money trading stocks. In the case above, using a chart of weekly data is by definition a longer-term view of the world. As such, you will require more thrust from a security to get excited about taking a position and will also let the position stay in place longer. In the above chart, you are a buyer above $120 and a seller below – simple as that. In the daily chart at the beginning of the blog, you are a buyer above the black line and a seller below. Because you are using daily information in the top chart, your black line will naturally move quicker and be more sensitive leading you to trade more frequently perhaps – a by-product of using a daily chart.
In summary, the time frame you choose to chart can greatly affect your investing posture as can which reference lines you choose.
Market Update
Strength in European economic reports and a good earnings showing from Home Depot (HD) brought investors cheer upon their return from the President’s Day holiday. Stocks closed Tuesday with a +0.6% advance. That was followed by a flat session Wednesday with good existing home sales being offset by weakness in oil prices. Oil prices reversed course Wednesday. But market action was again held in check, this time by Treasury Secretary Mnuchin’s suggestion that tax reform would likely occur in the summer months and by reports that Trump’s construction infrastructure push might be pushed to 2018. Market leader semiconductors also suffered with a downgrade of Nvidia (NVDA) shares perhaps being behind the dip. Interest rates slid pushing the 10-year note yield below 2.4%. Interest rates dropped further in Friday’s trade as market participants read this week’s Fed notes as suggesting no rate hikes will occur until May. After being lower all session, bulls bought the dip to push broad market indexes up +0.15%.
For the week, the S&P 500 rose +0.71%, its fifth consecutive week higher. The Nasdaq 100 (QQQ) was up +0.35%. Smallcap Russell 2000 (IWM) reflected some underlying weakness in the market and continued to lag the large-cap indexes, this week dipping -0.33%.
Warm wishes and until next week.