37-Year-Old Trend Indicates Major Gold Move This Month


All major U.S. stock indices closed higher for the week of March 7, with the small-cap-laden Russell 2000 leading the way with a 1.7% gain. In my Feb. 24 Market Outlook , I pointed out that three major U.S. indices -- the Dow industrials, Dow transports and Russell 2000 -- had yet to set new 2014 highs.#-ad_banner-#

As of Friday, only one index is left without a new year-to-date high, the Dow industrials. Overall, this is positive for the broad market as the various U.S. indices are now for the most part confirming each other's recent strength. However, the deeper that we go into 2014 without a confirming new high in the Dow, the more problematic it can eventually become from a Dow Theory standpoint. The Dow finished last week at 16,453, just 0.7% off its Dec. 31 all-time high.

Market Momentum Still Bullish, but Becoming a Bit Frothy
In my Feb. 18 report , I said that the bellwether S&P 500 was at a near-term inflection point according to market momentum, from which its larger 2013 advance should resume if still valid. The index set a near-term low at 1,825 two days later, on Feb. 20, and has since risen by an additional 3%. Especially when paid attention to at the right times, these momentum indicators can not only point out near-term inflection points for prices but can also warn when an asset or index is getting a bit overextended and frothy.

The blue line in the lower panel of our first chart plots one such momentum indicator, a 63-day (quarterly) Relative Strength Index (RSI) based on the daily closing level of the S&P 500 since 2012.

The red highlights on the chart show that, after bottoming on Feb. 3, quarterly RSI is closing in on an overbought extreme of 59% that previously coincided with or led most of the near-term U.S. broad market peaks in recent history. This metric is not flashing a sell signal at the moment, but it is now close enough to these previous extremes that investors may consider keeping a closer-than-usual eye on the market for signs of upcoming weakness or investor fear.

Watch for a Pause in Gold's Recent Advance
Also in my Feb. 18 report, I pointed out that gold appeared to be in the early stages of a major bullish trend change. Since then, the SPDR Gold Trust (NYSE: GLD ) has risen by an additional 1.5%. Our next chart, however, warns of a potential bump in the road for the recent advance in gold prices before they continue appreciably higher.

The chart, which plots the annual seasonal trend for gold prices (London PM fix) since 1977, shows that the month of March is by far the seasonally weakest of the year for the price of the yellow metal, declining by an average of 1.04% and posting a negative monthly close 57% of the time.

So, while gold prices still appear to have established a major bottom at their mid-to-late-2013 lows near $1,200 per ounce, this 37-year metric suggests the potential for a corrective decline this month as the market digests its recent gains.

This article originally appeared on ProfitableTrading.com:
Market Outlook: 37-Year-Old Trend Says Gold Prices Will Correct This Month

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

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