Important Test for Gold
The market continues to roll on as is its
tendency seasonally during the period running into January. As we have stated
for many weeks, as long as all the major averages don’t break key support and
key trendlines, the benefit of the doubt lies with the bulls. Note that our
rigid criteria are getting more opportunities in the last few weeks as well, so
traders have some areas of investment to consider on these breakouts.
We have argued that despite the intermediate
breakdown in the dollar that it is unlikely to break major support in the 78-80
level and that with The Economist cover showing a weak dollar, time may be
running out for dollar bears. This week the US economy showed a bit more
resilience than many forex traders had been expecting and the EUR in particular
has taken a bit of a hit. It is still of course possible for the dollar to fall
to its major support area in the weeks ahead and for the EUR to test 1.35-7, but
we continue to doubt a new substantial leg down in the dollar that will take it
below 78-80 is underway.
We have also been concerned about the implication
of the dollar move on other markets and that moves in related markets might be
short-lived by the short-lived dollar decline. One of the main related markets
is gold. In fact gold and gold stocks look to be embarking upon an important
technical test that investors should closely monitor.
GLD, the gold ETF, tested intermediate support at
55 in October and has been rallying off of that level since. At the same time
XAU tested substantial support at the 120 level and also has bounced off of that
level since early October. But with the dollar no longer falling swiftly, both
gold and gold stocks have started to decline and are now facing an important
test of the up trend that started in early October. Right now GLD is falling
into support between 60-61 on a number of counts — from its intermediate up
trend channel, and from the 50 and 200 day ma. XAU, the gold stock index, is in
a similar technical situation, with support between 138-141 testing its
intermediate up trend channel, its 50 day ma, and its 200 day ma. This test of
substantial technical support in both gold and gold stocks is likely to be
important. A break by both GLD and XAU below these support levels would likely
send both back to test their October lows and would put these vehicles in broad
trading ranges rather than directional trends. Such a break would also suggest
that the dollar decline may be over sooner rather than later and that a test of
80-78 may not even develop here. Let’s watch this important test closely.
We continue to recommend bond exposure be
lightened as TLT’s get above 92 but that bond exposure be maintained as a strong
portion of portfolios until evidence mounts that leading economic indicators are
turning higher.
Oil stocks are leading the current advance. Even
the list of close calls and valid trades via our rigid criteria are showing
opportunity in energy related companies like BTJ and CKH. Oil stocks continue
basing and showing leading relative strength while oil and natural gas are still
formulating bases or trying to find support. We continue to suspect that energy
stocks and China region stocks remain prime candidates for a major mania later
this decade and that buying these on corrections during the expected
soft-landing will make good long-term trades.
The market is running and trading opportunities
are growing more ample, yet we still advocate some offsetting bond exposure and
a less than aggressive allocation going into an economic growth slowdown that we
suspect will only become a soft-landing. Soft-landings can be difficult to trade
in a risk averse fashion. Yet if this does develop as we have been suggesting
since this summer, it will be long-term equity bullish.
Overall we still continue to suggest less than
aggressive allocation to global equities, however we would no longer look to add
or accumulate TLT’s on corrections and would begin taking partial profits on
TLT’s over 92. We still expect that the slowdown is not over and that the Fed
will not letup on a tightening bias until the slowdown develops more clearly so
that inflation does not reappear and get entrenched, but bonds gains have been
swift and further bond yield declines will become less likely unless a recession
develops. The risk of recession is still large enough that we would not suggest
selling ALL or even half of TLT’s yet, but some profit taking will soon be in
order we believe. We also continue to like some pairs, and some select big-cap
dominated groups along with the small number of stocks meeting our criteria for
below normal allocation to stocks with partial short-hedging in weaker groups.
Our US selection methods, our Top RS/EPS New
Highs list published on TradingMarkets.com, had readings of 78, 53, 76, 57 and
57 with 7 breakouts of 4+ week ranges, valid trades meeting criteria in CKH, OMX,
BTJ and ININ close calls. This week, our bottom RS/EPS New Lows recorded
readings of 5, 4, 7, 6 and 4 with 3 breakdowns of 4+ week ranges, no valid
trades and no close calls. SPI, BWP, CHDX, OTEX, OPNT, BRCD, TV, STEC, NUE, CKH,
OMX, BTJ, ININ remain open trades on the long side from this methodology.
Mark Boucher has been ranked #1 by Nelson’s World’s Best Money Managers for
his 5-year compounded annual rate of return of 26.6%.
For those not familiar with our long/short strategies, we suggest you review my
book "The Hedge Fund Edge", my course “The
Science of Trading“, my video seminar, where I discuss many new techniques,
and my latest educational product, the
interactive training module. Basically, we have rigorous criteria for
potential long stocks that we call “up-fuel”, as well as rigorous criteria for
potential short stocks that we call “down-fuel". His website is
www.midasresourcegroup.com.