Gold: Losing its Luster or Still Glittering?
Gold has certainly been a hot topic lately. The talking heads on television like to talk about gold prices quite a bit and conventional wisdom has pegged that market as a “flight to quality” or an “inflation hedge” market. In other words, people are thought to invest in Gold only when times are bad. But I have a sneaking suspicion that the opposite may be true. Have you ever heard the market adage “buy the rumor and sell the fact?”
Gold prices have bee trending higher for quite some time. Perceived weakness in the economy and substantial investment from hedge and commodity funds has propelled this market to ridiculous highs amid nerve-wracking volatility. However, the fund investment seems to have waned dramatically, as fund companies and investment banks seek ways to unlock cash to bolster other failing asset classes.
As a technical trader, I look for clues in the charts as to market direction, trend health and trader psychology. And over the past month or so, there have been some ominous signals.
First of all, the market spiked sharply at the contract high $1038.60/oz. on March 17th, only to fall back and close some $30.00 off of the high of the day. That, to me, is a clear indication that the upward momentum has been halted. Subsequently, the market then sold off in a “textbook” Fibonacci pattern and found support near the 68% retracement of the November low to the March high. Everyone that had bought the market and remained long during February and March had lost money by the end of March, as the market fell all the way to a low of $876.30 on April 1st. That spurred a new round of buying that saw the market gain back about $75.00 in two weeks. However, it appears to me that the bullish momentum has dissipated and the bears may be gaining control of the Metals.
The market has tested and failed to hold the 50 day moving average of closes, which is viewed by some as a “benchmark” average. (Many also use the 45 day average, as well) Stochastic and RSI readings are setting up to hook back lower and volume seems to increase on days of bearish activity.
I know that most readers are traders of the “long only” variety. In other words, you don’t want to hear about a market unless it is going up and offering an opportunity to try and profit from the long side of the market. How’s that strategy working in your stock holding? I would urge you to give some thought to a potential short play in Gold. This may not be a comfortable entry point in the futures, but there are some bearish Option strategies that you may find rewarding. Either Bear Spreads or straight purchases of Put options come to mind as ways to clearly define risk, yet leave potential for gains.
Only time will tell if I’m right. But I have a theory that the markets are “naturally gravitational”… they tend to fall faster and more dramatically than they rise. We’ve already seen some of that recently in the Gold… will more sharp price drops be on the horizon? The charts seem to indicate that to me.
Jeff Fosse is a market analyst for Striker Securities, Inc. He has traded stocks and commodities for 15 years. Fosse writes and distributes a daily newsletter for his clients that highlights where his technical price triggers are listed in 40 different commodity and futures markets. All of his recommendations have been archived and posted on his website (www.striker.com). Mr. Fosse can be contacted via email at jeff@striker.com or directly at 888-778-7453.