Markets

Has Gold Peaked? Where is Support?

Every time an asset class goes parabolic it captures my attention and gets my contrarian juices going. Most recently this asset class is gold. It seems that gold has cracked; the question is whether this is a lasting peak and where the next support can be found.

What the media says about a soaring asset class is as fascinating as what the chart says (first the media, than the chart).

Here are a few headlines from this Monday (August 22) when gold closed at 1,901.

'Gold at $1,870 is being seen as a haven' - Forbes

'Gold price poised to go parabolic to $2,100' - Beacon Equity Research

'Gold Shines On and On and On ...' - Wall Street Journal

'Gold in portfolio is mandatory' - MoneyControl.com

'Is $5,000/ounce the new target in gold's run?' - Barron's

The media speaks, investors listen. Also on Monday, the Wall Street Journal reports that the SPDR Gold Trust (NYSEArca: GLD) is now bigger than the SPDR S&P 500 ETF (NYSEArca: SPY).

Sure enough the media's relentless hype has fueled the modern day gold rush . 170 years ago, 'investors' armed themselves with picks, pans and shovels to get their hands on the precious yellow metal.

Today, investors can buy unlimited amounts of gold sitting in their underwear in front of a computer or with their cell phone while driving. This kind of trading flexibility causes irrational price spikes like what we've seen in gold over the last couple of weeks.

What Melts Up, Will Melt Down

The chart below shows the performance of gold since July 1. The two yellow lines are trend lines that go back as far as 2006. The push above the first trend line on July 12 was bullish. The push above the second trend line on August 8 was also bullish. There was no reason to bet against the up trend as long as gold remained above the trend line.

In addition to the rise above the trend line, percentR (a measure of relative strength) triggered a low-risk bullish entry on Friday, August 12. As long as gold remains above the August 12 low at 1,726.3, the trend was up (see Sunday, August 14 ETF Profit Strategy update). Within the next few days however, gold turned irrational and shot from 1,726 to over 1,900

When it comes to trading irrational markets, investors do well to be cautious.

At 1,900 the up side for gold seemed very limited and in Sunday's (August 21) ETF Profit Strategy update I warned subscribers: 'I don't know how much higher gold will spike but I'm pretty sure it will melt down faster than its melting up. This week's r1 is at 1,915, r2 is at 1,975. A failed daily low-risk entry would be a good time to go short.'

In case you are wondering, r1 and r2 are pivot-based support/resistance levels I use to identify potential turning points. Gold peaked at 1,915 and has dropped over 150 points (nearly 10%) since.

Tuesday's (August 23) ETF Profit Strategy update identified a key level for gold: 'A daily close below 1,826 would be bearish. As long as gold remains above 1,826 the trend is up. Today's big red candle engulfs yesterday's green candle, generally a bearish sign. If gold falls below 1,826 it may coincide with rising stock prices. Aggressive investors may short gold if it drops below 1,826 with a stop-loss just above. The corresponding price for GLD is 177.5.'

percentR provided an early warning signal when silver (NYSEArca: SLV) cracked in late April and allowed us to capture a 30%+ move. Now percentR has done the same thing for gold. Since it moved below 1,826 gold has been in a free fall, currently at 1,754 (GLD is at 170.50).

Where is Support?

Most immediate support is this week's s1 at 1,763 and where the August 12, low-risk entry was triggered, at 1,726.3. Next support is the upper trend line at 1,710.

Most important support and quite possibly the target for this correction is a moving average that has provided support for gold on no less than seven different occasions since 2009.

How will the mini melt down in gold affect stocks (NYSEArca: VTI)? The late April the meltdown in silver came a few days before the S&P (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq peaked (Nasdaq: ^IXIC). Is this a repeat of late April? It's too early to tell, but based on our analysis, new lows for the major stock indexes are likely.

The ETF Profit Strategy Newsletter provides guidance for the U.S. stock market and major asset classes like gold, silver and bonds. The most recent update reveals the moving average that halted every gold correction since 2009 along with price targets for the S&P.

Tradeable gold ETFs include: SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU), ProShares Ultra Gold (NYSEArca: UGL), ProShares UltraShort Gold (NYSEArca: GLL), Market Vectors Gold Miners (NYSEArca: GDX)

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


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

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