We haven’t done an update on gold and gold stocks since the end of February. The reason for this is that their charts have been broken. As technicians we look at price, volume, trend, strength, sentiment etc. to help us determine the likely path of a security. But, when price breaks down hard it skews the chart pattern so badly that the most important component for technical analysis (price) becomes of little value (other than the obvious message that the stock is broken). As a result, all we can do is wait for enough time to pass for the stock to reassert a readable pattern. Finally we’re starting to see a trickle of information from precious metals charts.
In early February when GLD was trading above 160 and bouncing against the underside of its short term down trend line we gave up almost all bullish hope for the metal. By the 13th of February we stated that if GLD traded back down to 150 that “GDX will almost certainly break below $39 in a very sharp and very ugly way.” which ended up being the case. On the next day Twitter sentiment for GLD broke down and we ended the counter trend bounce signal from sentiment (indicated by the vertical blue line on the chart below) and determined that the down trend was resuming.
We’re now starting to see some meaningful information. It’s not a lot so don’t get too excited, but at least we have something to watch. First we want to point to volume and price when GLD fell from 150 to 130. The large volume tells us that someone (or lots of someones) capitulated. That capitulation removed some overhead supply which allowed gold to have a good counter trend bounce. Now is where the fun will begin. Will precious metals continue to move up, or will they resume their down trend?
For some clues we’ll look at Twitter sentiment. In the chart above for GLD we’re seeing some weak confirmation of the move up from 130. The fact that this confirmation is weak is a pretty good thing from a contrarian point of view. Not a lot of people are cheering GLD’s move higher as we saw during the rally in Early March. This tells us the chasing of gold is over. People have been shaken and it will take good reasons for them to become buyers. That will add some rationality to the gold market which is needed to sustain a new uptrend.
We’re still a long way away from seeing a counter trend bounce signal because we first need to see a positive divergence from sentiment. The next few downward moves in GLD will give us a clearer picture. It’s not necessary for GLD to break 130 for that condition to appear. There’s plenty of room between current prices and the last lows for some resolution between price and sentiment if it occurs over enough time.
Gold stocks (GDX) are painting a similar pattern to GLD, but with a bit more chasing by traders. If the patterns can hold then gold and gold stocks just may have a chance at creating a durable low. We’ll post another update if we see signs of strength or further breakdown.