Did Gold Peak on Octobler 18th?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Gold as measured by the ETF GLD fell 3.2% in New York trading on Tuesday. Its chart looks very similar to December 2009 when it experienced an intermediate peak.

Early last December, gold had been rallying for three months. Sentiment was extremely bullish. GLD (and SGOL and IAU, the other ETFs which hold physical gold) was well above its simple 50-day moving average. The technical indicator RSI had become extremely overbought on the daily charts in late November, rising above 80. After a slight dip below 80, the RSI then rose to a merely overbought 80 as the price of gold hit a higher high. This negative divergence signaled the gold rally was done for the next few months. Gold then gapped down and had a sharp drop with the RSI quickly fallingl toward a neutral 50. 

More recently, gold has been rallying since late July. Sentiment has been extremely bullish for quite awhile. Gold has been trading well above its simple 50-day moving average. Gold became overbought by the last week of September and entered extremely overbought territory on the daily charts at the end of the month with the RSI rising above 80. By early October, the RSI was even higher. Then there was a quick dip below 80 and the RSI rose and hit 80 while the price of gold hitting new highs. The negative divergence once again signaled trouble. On Tuesday, gold gapped down and had a sharp drop. The RSI had even a bigger drop falling toward 50. The pattern is almost identical to December's, although gold was a bit more overbought and overbought for a longer period this time around. 

If gold follows last December's pattern, it will fall toward its simple 200-day moving average. For longer term holders, this is not a significant move. Shorter term position traders should be more concerned. Regardless of your investing time frame, this doesn't look like a good time to add to positions. In long-term bull markets, and gold has been in a long-term bull market since 2001, investors should add to positions when the price of an asset is around its 200-day moving average.  

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

There is no intention in this article to endorse the purchase or sale of any security.

Do Conditions Exist for a Fall Stock Market Crash?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Market crashes don't take place overnight. They result from excesses that build up because the market has failed to neutralize them with intermittent bouts of selling. Stock prices always correct and if they don't do so by smaller amounts every now and then, they will correct by bigger amounts later on. While crashes almost always take place in the fall, the possibility that one might occur at that time can usually be ascertained by the condition of the market in the preceding spring.

When there is going to be trouble in the fall, the market should already be showing frothiness around March and April. This condition is currently being met. U.S. stocks have been in rally mode for over a year now without any significant correction. Sentiment indicators are starting to indicate too much bullishness and too much complacency. The most recent Investor's Intelligence poll found less than 20% of investors are bearish. This is a low number. Market Harmonics put/call volume ratio for equities has fallen to multi-year lows and is well into extreme bulllish territory. The VIX (the volatility index for the S&P 500) made a new yearly low of 15.32 today, April 12th, and this is also quite low. All of the aforementioned are contrary indicators and the lower the numbers, the more bearish it is for stock prices going forward.

While the market could certainly be characterized as overbought, the technical indicators I use don't indicate that it is severely overbought just yet, especially on the intermediate-term charts. The stock market indices got to incredibly oversold levels in the fall of 2008 and spring of 2009 and they are still working off this condition. One of the most amazing aspects of the current rally is the lack of volume support for the Dow Jones Industrial Average. Volume peaked at the bottom in March 2009 and has been in a long, slow decline since then. Declining volume on a rally indicates buyers are losing interest. For a rally to hold up for more than a year given this condition is truly amazing.

Some selling in stocks could start any time in the next few weeks, but this would probably not indicate the end of the rally. A break in a market that is already frothy can be patched up and the market can then go even higher. When that happens there is risk of much greater selling a few months down the road. Abundant liquidity is always necessary for this to occur. That exists today just as it did in 1929 and 1987. Other underlying conditions are different however. While the 1987 market was supported by falling interest rates and lower commodity prices, current conditions are just the opposite. Now longer-term interest rates are changing trend and are going to higher levels. Commodity prices,with the notable exception of a number of food commodities, are also going higher. These are negatives in the long run for stock prices. There is also political risk to the markets later this year because U.S. capital gains rates will be raised in 2011. Ironically, the higher the market goes now, the bigger investors' profits will be and the more likely they will sell before the end of the year.

The easiest way for investors to check up on the rally is to watch the VIX. While anything at the 15 level is pretty low, the VIX fell slightly below 10 in late 2006 and early 2007. Macro economic and market conditions are not as supportive now as they were at that time though, so it should not be assumed that these same ultra-low levels will be reached again. The VIX tends to bottom several months before a major stock market sell off as well. It bottomed in May in 2008 for instance and the S&P 500 low for the year was in November. Investors who think the VIX has bottomed can buy the ETNs, VXX or VXZ. This is the same as shorting the market, but is a simpler way of doing it.

Disclosure: Long oil

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This article is not intended to endorse the purchase or sale of any security.

Is the Gold Correction Over?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Gold has had a sharp sell-off that has took it down over $100 in four trading days from December 3rd to the 8th. The rally that began in early October took spot gold up $200 from the breakout point of $1025 to a high of $1226. Approximately 50% of that was lost by the afternoon of December 8th in New York Globex trading. The $1125 level was tested again the next evening at 2AM New York time in Hong Kong trading. A 50% drop is a key Fibonacci retracement for rallies and a common place where counter moves stop. The next Fibonacci support level would be around $1100 for spot gold if the $1125 level doesn't hold.

Other technical considerations necessitated spot gold's drop to at least the $1125 level. GLD, the largest gold ETF, had a gap on its chart just above the $110 level (it represents one-tenth of an ounce of gold and it trades at a slight discount to the spot price). That gap got filled on Tuesday. It is very common for price to trade down to the bottom of a gap, so this move was not unexpected. GLD then bounced off its 30-day simple moving average. It slightly pierced the 50 RSI level, something it also did in its last sell-off. The 50 level should be acting as support. Only a few trading days previously GLD was overbought on the RSI on the daily charts and this condition was mostly resolved on Friday, December 4th in only one day of trading. GLD was also overbought on the weekly RSI and this is also now mostly resolved, but it looks like a few weeks of back-and-fill sideways trading will still be necessary.

While sharp corrections are unnerving to investors, they are common in strong bull markets. The bigger picture is still very positive for gold and for silver. Not only is there no technical damage on the daily charts, GLD is on a buy signal on both the weekly (intermediate-term) and the monthly charts (longer-term) and so is SLV, the major silver ETF. When in doubt, investors should always consult longer term charts for guidance and remember that in bull markets, pull-backs are opportunities for buying.

When contemplating what to do in a sell-off during a rally, investors should also ask themselves if any important negative major changes are taking place. For the moment, the answer to that is no for gold. Are governments going to stop their super easy money policies or budget-busting stimulus plans? Don't hold your breath. Just yesterday both the U.S. and Japan both announced new stimulus plans. Just today, the U.S. announced that the TARP program would be extended to October 2010. The proverbial government printing presses are still in 24-7 operation and will be for some time. Gold investors will be one the prime beneficiaries of these policy moves.

Disclosure: Long gold and silver

NEXT: The Common Roots of Hyperinflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gold in Technical Correction as Dollar Rallies

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Gold had a sharp drop on Friday, December 4th. It was down more than 5% at one point, but closed at $1161.40, off its low. Gold was overbought on both the daily, weekly, and by one measure even on the monthly charts. It needed some pressure taking off after rallying almost every day and hitting one all-time high after another in November. While the bears are coming out of the woodwork and claiming the gold rally is over (as many have claimed was imminent for several months now), there is merely a needed technical correction taking place. The gold charts are so bullish that it would take a lot more selling before the technical picture became damaged. While gold is selling down, the U.S. dollar is not surprisingly rallying since they tend to move in opposite directions. As is the case with gold, it will require a lot more than a few days to change the technical picture of the dollar.

Almost the entire drop in gold prices on the 4th took place during New York trading. What supposedly set off the drop was the U.S jobs report for November, which had much better numbers than expected. While even a cursory analysis of the report indicates that the picture is not so rosy - large numbers of part-time positions suddenly appeared out of nowhere and retailers cut employment during the height of the holiday selling season - the mainstream U.S. media trumpeted the 'good' news, while ignoring the inconvenient facts. Talk of possible sooner than expected Fed rate hikes was cited as the cause of the selling in the precious metals and the rally in the dollar. A Fed rate hike would damage U.S. stocks a lot more than gold, but stocks rallied strongly on the jobs news. So much for that theory. The price of gold is related closely to inflation and future U.S. inflation is already baked in the cake because of all the money printing the Federal Reserve has been doing. It will take years before all the inflation damage from the current bout of easy and fake money fully manifests itself.

It will also takes years before the Credit Crisis money printing operations are finished damaging the U.S. dollar. That doesn't mean it will go down every day in the interim, just like gold won't go up every day. The trade-weighted dollar has been selling off since March. It has been trading continually below its falling 50-day moving average since April. It managed to peak above the 50-day once in early November. December 4th was the first day it managed to close above it in more than seven months. To return to rally mode, the dollar would have to stay above the 50-day, rally to its 200-day moving average (well above its current level), stay above the 200-day then the 50-day would have to cross the 200-day. This would require two or three months minimally and around six months would be more likely -assuming that it is going to happen. That assumption as of now is based on one day's trading activity indicating a change in an eight month trend.

Dollar rallies in the last several months tend to be concentrated in only one or two currencies in the trade-weighted basket, indicating a helping hand from the respective central banks. The last rally in early November was based on a strong move down in the euro and Canadian dollar. The weak British pound actually went up during that time. This dollar rally has been more concentrated in the Japanese yen and Bank of Japan intervention should be assumed. The falling dollar is a risk to major exporting countries and they want to drive their currencies down versus the dollar. U.S. authorities seem quite complacent about the falling dollar however because they believe it will increase U.S. exports. Without macro policy changes such as significantly higher interest rates (that would be well above the current zero level in the U.S and a quarter, half or even a whole point rise wouldn't do it), central bank intervention to alter currency relationships gets undone pretty quickly.

The technical picture in gold is not fully resolved yet. A little more selling will be necessary. This can be mixed in with a lot of volatility. The intermediate picture is still up for gold and the other precious metals. So far, this looks like a mid-rally correction. The correction is merely taking place a lot faster than is usual. As of now, the most probable peak for the current gold rally is still in the March to May 2010 time frame.

Disclosure: Long gold and silver.

NEXT: More Government Stimulus and More Debt

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

For Gold, Overbought Means Overgood

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Gold hit another record high this morning. After closing at $1151.90 (up $6.30) at 5:15PM in New York on Friday, spot gold began rallying in Hong Kong and Sydney trading Sunday night. Shortly after trading began Monday in New York, gold reached $1171.60. Spot silver traded as high as $18.93, above its highest price last week. This is the seventh day in a row that gold has traded higher. Gold rose last Friday, even though the U.S. dollar was rallying.

COMEX December futures expire next Monday, November 30th. There is a lot of talk about the $1200 price point acting as a magnet at the expiration. It may indeed happen, but the ETF GLD has become overbought on the daily charts as of today after gapping up strongly (the price will have to trade down into the blank area of that gap at some point). GLD will hit overbought levels this week on the weekly charts as well. Some give back in price is going to be necessary soon. It may wait until after the first few trading days of December however. SLV stayed overbought on the daily charts and continued rallying for two weeks this September before there was any significant price decline.

GLD itself became overbought on the daily charts and rallied for two weeks also in September of 2007. This was at the beginning of the gold rally that lasted until March 2008. That rally had a midway pause (referred to as a high tight flag by technicians) approximately 7 weeks after GLD first became overbought on the dailies. However, the midway peak began about 1 week after gold became overbought on the weekly charts (four months before the rally ended). Since the overbought conditions are taking place coincidentally this time, we can get the midway pause for the rally starting anywhere from early December to the second week in January. Once this takes place, you can double the amount of rally from $1033 that has preceded it to get an approximation of the coming peak in spring 2010.

The silver ETF SLV has different technical patterns that does GLD. On the weekly charts, SLV isn't even remotely overbought and if silver kept on going straight up it would take approximately two more months before this could happen. A pause with some retracement and it could be another four or five months. A strong overbought condition on the weekly charts was the end of the SLV rally in March 2008. As for the daily charts SLV was overbought in February, late June and September of this year. Each overbought condition caused a temporary peak and SLV then traded higher later on. SLV still has a way to go before being overbought again on the daily charts. Look for this to happen. It will likely mark the beginning of the mid-rally pause for both silver and gold.

Disclosure: Long gold and silver

NEXT: When the Invisible Hand is the Government

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.