"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, November 15, 2014

GLD Holdings Vs. Gold Price

At the request of one of the regular posters here, I have constructed a chart comparing the reported holdings of the large gold ETF, GLD, to the price of gold over at the Comex.

As the frequent readers know by now, I view GLD as a proxy for Western-based investment demand for the metal, similar to the manner in which the World Gold Council views it as they just related in their most recent report published this past week.

Notice the symmetry between the two lines on the graph. Both tend to rise and fall together. By the way, when the data is graphed on a logarithmic style plot, the relationship is even more similar.

Weekly View of Gold

Here is a quick look at the intermediate term chart of gold.

There are several things that stand out to me as I survey this chart.

Let's start with the various phases. I have delineated these with the variously colored shaded rectangles for your convenience.

I think the chart speaks for itself.

The peak above $1900 in September 2011, was the climax of the then bull market. Subsequent to that, the market entered what can now be clearly seen as a transition phase. However at that time, we as technicians were unclear as to whether the great bull was finished or was merely taking a rest, gathering itself for another rampage higher.

This transition phase, or consolidation, occurred over a period of 15 months in which the price was essentially range bound. The top of the range that formed was $1800 and the bottom was $1530-$1525.

There is something interesting about this range which we can see clearly in retrospect. The $1800 ceiling was a triple top just as the $1530-$1525 level was a triple bottom. The old trading adage that "triple tops or triple bottoms rarely hold" turned out to be true, but not for the upside. The reason for that is because the US Dollar bottomed out near 79 (USDX) that very same month ( October 2012). As it rallied, any hope for gold taking out $1800 was dead.

In April 2013, gold officially entered its current bear market with a clean break to the downside of that broad range trade defined during the Transition Phase. We remain in that bear as of this weekend.

Please note that gold throughout the bear that has unfolded, gold was demonstrated all the classic signs commensurate with bear markets, namely a series of LOWER highs, with the exception of a horizontal support zone that had formed near $1180.

Unlike the previous trading range where the highs were at the same level ($1800) and the lows at the same level, ( $1530-$1525), the current state has shown us that very good buying has been present down at the $1180 level. So much so that once again, another Triple bottom had formed there.

The market clearly violated that level three weeks ago but has since then not seen much in the way of additional downside follow through. That is evidencing a reluctance to extend the break lower at this time. Normally, when one sees a clean break either ABOVE or BELOW a broad consolidation range, in order to validate it, good technicians like to see three things: First - a move OUTSIDE THE RANGE of 2% or more; Secondly, - strong follow through, and Thirdly - SUCCESSIVE strong downside closes.

In the case of the first requirement, a 2% move below $1180 means price would need to drop another $24 to confirm the breakout. That it did with the market easily falling past $1156.

On the second point - we also got the strong downside follow through the previous week with the price moving as low as $1130. That is a 4% move below the $1180 level.

However, and this to me seems to be the key ingredient that it thus far missing - the all important WEEKLY CLOSES have yet to confirm a 2% move down. In other words, from the perspective of a technician looking to confirm the downside breakout of the triple bottom at $1180, gold would need to sustain a WEEKLY CLOSE BELOW $1156 to confirm a new leg lower.

As you can see from the chart, it clearly has not done that. The week immediately following the downside support breach put in a close at $1169.80. That was well above the 2% threshold. This Friday's close was actually ABOVE the $1180 level, coming in at $1185.60. Thus, as of now, we have not gotten CONFIRMATION that the downside breach of $1180 is valid as far as setting up another leg lower.

By the way, can I just make a quick comment here - any of those pestilential gold newsletter writers who are always bullish gold no matter what, and who state that gold is in a bull market, are not worth being paid a  single dime. Any supposed 'technician' who cannot get something this evident correct is rather frightening in their ignorance. Gold has been a bear for almost 20 months how. Save your money and spend it on something more productive than keeping such misleading writers in  the business of producing such nonsense.

Now that we have covered this, let's come back to something I stated a while back in a previous post. Throughout the entirety of this bear market, there has been countertrend rallies, which have provided opportunities for those traders who are very short term oriented to profit from by playing from the long side of the market. The caveat I added was that they need to be very quick on the drawn however as the rallies have all tended to end with rather sharp downside moves meaning that most of the profits from such trades can be lost unless a trader has been nimble and fleet of foot.

Take a look at this chart in its entirety and note the BLUE ARROWS. I placed them below what we technicians refer to as "Spike Bottoms". Notice also that in ALL THREE PHASES of the gold market, BULLISH, TRANSITION, and BEARISH, these spike bottoms are present. What does this tell us? Simple - gold has a tendency to put in spike bottoms when it reverses direction.

Traders who understand this particular "quirk" of gold's personality can take advantage of that. These are signs that the market has been sold out temporarily. Notice that after each and every one of these blue arrows, the price has rallied. During the current bearish phase, it has provided traders with both the opportunity to make a long side bet as well as eventually finding a higher level from which to reenter on the short side. Remember, the trend is down until proven otherwise but one can always place short term trades while positioning also in the direction of the prevailing trend at key technically significant levels.

Please note that I have also drawn in a RESISTANCE ZONE on this chart which bulls might possibly be able to reach if this Friday's rally turns out to be more than another of those one day wonders. It comes in near $1240 on the chart and is shown by the blue rectangle. That level served to hold the market back in May of this year when it fell to that point and then rallied $100 up to $1340 before failing. However, it gave way most convincingly in September this year, was briefly violated in a short term countertrend rally but the price could not CLOSE above it. It should thus now serve as an upside cap on any subsequent move higher in price. If the market does manage to put in a WEEKLY CLOSE of any significance above $1240, it would decidedly change the complexion of the price chart. One would then have to give some real credence to a solid bottom being in for gold. Only time will tell us however whether or not this is the case. Anything prior to that is pure GUESSING.

Lastly, let me leave you with a LONG TERM MONTHLY chart of gold.

Clearly gold has lost long term trendline support on the monthly chart confirming the current bear. It is however finding some support in the confluence of the zone I have noted. The Fibonacci retracement level of the rally from the 2008 to the 2011 top is $1152. It fell through that level but was able to recover. That is a positive sign.

However it still remains BELOW both trend line and has yet to exceed the previous month high of $1255.60. To give some bullish credence to this otherwise dour looking chart, the metal would at a bare minimum need to exceed that point to get technicians a bit more upbeat on its prospects.

A MONTHLY CLOSE ABOVE $1340 would be necessary to give even more confidence that something more important is afoot.

As stated many times here, and which needs to be repeated - There seems to be a mistaken impression among many people that markets that are going down will bottom and then launch into a bull market with little or no warning. The reverse also seems to be another just-as-frequently mistaken view, that a market which has been going up, will stop going up, reverse and then enter a bear market.

In some cases, notably in the grains, this can be occasionally true due to unpredictable weather driven events. But more often than not, there are TRANSITION PHASES, as I have detailed above, that will occur. These are periods of sideways trade during which a market will move up and down, back and forth, for many months at a time, generally going nowhere outside of the range. Gold may very well be going back to a pattern like that. Or it may not; it could be forming a temporary respite from the selling before making a new leg lower. Or it could be ready to move past $1340 and start something more exciting.

The simple truth is that there is not a single human being on this planet who really knows. We all have our ideas and opinions, but that is exactly what they are, ideas and opinions. Until we get some sort of confirmation any dogmatically asserted opinions, no matter how often that they are repeated, are just people looking for attention as they make their guesses. Don't fall for that.

The market will tell us what it wants to do when it is good and ready to do so. Our business as traders is attempting to ferret out exactly what that voice might be saying.