Gold charts start to shine

It’s had a stellar start to 2016 – is a bull market for gold back on track?

Summary: SPDR Gold shares are up 12 per cent this year, and yet the precious metal is officially still in a bear market. February gains have moved the price of gold above the bear market trendline, and US dollar falls are contributing to a price boost. 

Key take out: The evidence is positive for gold recovery – if it doesn’t pull back, I would wait for it to stabilise and then go with any future upside breakouts.

Key beneficiaries: General investors. Category: Commodities.

Gold is off to a great 2016. The SPDR Gold Shares (ticker: GLD) rose for the seventh consecutive day on Monday, and is up 12 per cent this year.

And yet, on the charts, gold is still officially in a bear market. To be sure, bull markets begin at major lows, but we only know with any confidence that the market has indeed bottomed well after the fact.

How can we tell that a bottom is in? Typically, we will see the series of lower highs and lower lows that define a bear market end with the first higher high and higher low. As of Monday, that has not happened. Gold touched $1,200 per ounce, which was a hair above the previous high set in October 2015, but in the context of a long bear market that is not a significant breakout.

Let’s look at some of the technicals now lining up on both sides of the argument.

Starting with the bullish side, the February gain to date moved the market above the bear market trendline drawn from the October 2012 high (see Chart 1).

We can make an argument that momentum indicators set bullish divergences with price before gold turned around, but I think it was a weak signal. Weekly RSI (relative strength index) never reached oversold conditions, so while RSI moved higher as prices continued lower, I do not see it as more than the regular ebb and flow in a bear market.

On shorter-term charts, prices have moved above the 200-day average, but that is just a setup for other technicals. It is not a buy signal on its own. Since early 2014, gold has traded above this average on at least five other occasions, yet the major trend remained to the downside.

And that brings us back to the lack of higher highs and higher lows. As we can see in the chart, the $1,200 level is a resistance area, and in the context of a five-year decline of nearly $900, we need to see resistance broken by more than just a few dollars.

The rally from the December low is continuously accelerating and short-term RSI readings are clearly showing overbought conditions. Therefore, bulls might be jumping into an emotionally charged market that needs to calm down in order to put together a sustainable advance.

Further, silver has not followed suit with breakouts above its own bear market trendline or 200-day average. I’d be more inclined to look at platinum for a trade due to a deeper bear market and clearer short-term RSI divergence. But that is not argument enough for a sustainable bull run in precious metals as a group.

Gold mining stocks present a better argument for the bulls, as the Market Vectors Gold Miners exchange-traded fund (GDX) has moved above its October 2015 high as well as its trendline and 200-day average (see Chart 2).

Volume since the sharp sell-off last July has remained elevated, so there is definitely increased interest in this group. Chart watchers believe that volume can lead changes in price, so this indicator supports the bull case. Unfortunately, with the ETF gaining roughly 40 per cent since the middle of January, we have a legitimate argument that a pullback is needed before risk levels come down to something more reasonable.

In early December, I wrote here that gold had support at $1,000 but could overshoot that with a drop to $900.

Gold traded as low as $1045 that month before firming up. Given the strength of the gain, I will probably have to take the lower target off the table and say that the market got close enough to support. But given the way gold rallied, based on its technicals I have to think that the current frenzy will abate.

In addition, the US dollar index has lost nearly 3 per cent of its value since early December, which is a very large move in the currency markets. Since gold is priced in dollars, a weak greenback boosts the metal’s price with all else being equal. Considering that the major trend in the dollar is still up, the gold market may lose this fuel.

There is evidence that gold is starting to change for the better. Of course, nothing is guaranteed, and if it does not pull back I would look for the metal to stabilise at current levels and probably go with the next upside breakout, should one occur.


Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

*This report is republished with permission from Barron’s.

Related Articles