Market tops and bottoms are always a popular topic of
conversation. There are a number of theories about how to
forecast key turning points in advance, but, in reality, those
theories rarely work.
While it does seem like an exercise in futility to forecast
the day and price of tops and bottoms, there is valuable
information to learn from studying the general nature of market
turning points. This knowledge will help us understand what to
look for and how to react to the market as it develops rather
than provide a false sense of comfort about what we should
In the stock market, we tend to see tops build slowly and
bottoms appear unexpectedly. This can be seen in the chart below,
which shows the 2007 market top on the left and the March 2009
bottom on the right.
SPDR S&P 500 ETF (NYSE:
built a top slowly, over a period of several months. The bottom,
on the other hand, came unexpectedly and was greeted with
This pattern has been seen at other significant stock market
turning points. The bottom that occurred in 2002 was also
unexpected and sudden, while the top in 2000 had been formed over
several months. While the top was forming, stocks moved within a
relatively narrow range as the transition from bull market to
bear market was completed.
This behavior can be explained with investor sentiment. In a
bull market, investors become conditioned to buying dips. They
respond to price drops by buying, and this is why we see prices
trade in a consolidation pattern at a top. Buying the dips shows
up as support on a chart, and excessive valuation levels prove to
be resistance levels.
Bottoms in stocks begin when sentiment is negative and selling
has reached a peak. When the selling pressure is exhausted,
prices rebound suddenly.
Gold and other commodities tend to behave differently, as the
next chart shows.
Gold futures are shown in this chart because they have a
longer trading history than
SPDR Gold Shares (NYSE:
. The behavior seen in these charts is the opposite of what we
see in the stock market. With commodities like gold, investors
seem more concerned about missing the upside than buying at a
This might be because gold cannot be valued like stocks. In
March 2009, some investors considered stocks to be a bargain
based on price-to-earnings (P/E) ratios and other valuation
tools. Similar tools for gold do not exist, and the market moves
based solely on what investors believe gold should be worth. When
it is moving up, investors seem to be willing to push the price
higher, and when the decline starts, they seem willing to forget
about gold as an investment option.
The next chart shows that, for now, GLD appears to be in a
consolidation pattern that could be the beginning of a bottoming
This pattern has been developing over the past seven months,
and there is no indication that GLD is at the beginning of a new
bull market yet. We could actually see gold trade near these
levels for several years.
As gold finds a bottom, there will be a number of trading
signals generated by any trading system.
26-week rate of change (
has been long
iShares Silver Trust (NYSE:
for several weeks, but the system is now moving to cash in the
precious metals sector. SLV is a sell this week.
After selling SLV, the model portfolio will consist of four
This article was originally published at
A Turning Point in Gold Could Be
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