I’m bullish on Gold, here’s why

The broad market captured a solid sessions of
gains yesterday, although resistance of their June 15 highs caused the major
indices to give back some of its advance during the final hour of trading. The
Nasdaq Composite advanced 1.6%, while both the S&P 500 and Dow Jones Industrial
Average closed 1.0% higher. As we often see on strong days in the market, small
and mid-caps led the way higher. The Russell 2000 gained 1.8% and the S&P Midcap
400 rallied 1.9%. Each of the major indices finished in the upper third of their
intraday ranges, but well off their highest levels.

Total volume in the NYSE rose by 11%, as volume in the Nasdaq was 17% higher
than the previous day’s level. The higher volume gains across the board enabled
both the S&P and Nasdaq to register bullish “accumulation days” yesterday.
However, it is important to note that turnover in both exchanges still came in
below 50-day

moving average
levels. If institutional buying was in full swing,
volume levels would have spiked much more significantly and the closing
price action would have been stronger as well. Nevertheless, overly positive
market internals confirmed the bulls definitely had the balance of power. In the
Nasdaq, advancing volume exceeded declining volume by a wide margin of 9 to 1.
The NYSE ratio was positive by more than 4 to 1.

As the strong market internals indicated, there was healthy buying interest in
nearly every industry sector yesterday. Even sectors that have been showing
relative weakness, such as Oil, Gold, and Metals, all registered solid gains.
Because so many industry sectors are in strong downtrends, yesterday’s gains in
most of the ETFs were nothing more than technical bounces off the lows. However,
the StreetTRACKS Gold Trust
Quote |
Chart |
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is one ETF that may be poised for for a
breakout above its six-week downtrend line. Looking at the daily chart below,
notice how GLD closed just above resistance of its downtrend line from the May
12 high:

Despite a steep correction over the past six weeks, the longer-term weekly chart
shows that GLD remains in an uptrend since its July 2005 lows. The longer the
time frame of a chart, the more significant the direction of its trend.
Therefore, an uptrend on a weekly chart typically overpowers a shorter-term
downtrend on a daily chart. However, the key is to wait for the break of the
daily downtrend before buying in anticipation of a resumption of the longer-term

After the broad market rallied sharply on June 15, stocks gave back a majority
of their gains over the next two days that followed. Buyers returned to the
scene yesterday and attempted to follow-through on the rally attempt, but the
prior highs from June 15 put the brakes on the upward momentum. The hourly chart
of the S&P 500 below is a great example of how basic price levels such as prior
highs and lows usually act as as substantial points of resistance and support:

As you can see, the Nasdaq Composite also stalled after probing just above its
prior high from June 15:

Obviously, those highs are the same areas of resistance to watch over the next
few days. If the S&P 500 or Nasdaq manages to close above its June 15 high, it
would also result in the index breaking out above its six-week downtrend line.
Note that yesterday’s gains caused both the S&P and Nasdaq to finish just below
their respective downtrend lines that began with the highs of May 10. In the
S&P, a breakout above its daily downtrend line would also result in a recovery
back above the 200-day moving average. The major indices are certainly within
striking distance of breaking their downtrend lines, but it is important to not
“jump the gun” and begin buying ETFs while the downtrends in both the S&P and
Nasdaq remain in effect. As for shorts, we are holding off on new entries for

Open ETF positions:

Long TTH, GLD, and TLT (regular subscribers to

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of
Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron’s other services, visit
morpheustrading.com or send an e-mail
to deron@morpheustrading.com