Bond King Likes Gold, Should You?

04/23/2015 10:00 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

Since bond king Jeffrey Gundlach recommended this Gold ETF as his “favorite actionable investment over the next 6-12 months,” MoneyShow's Tom Aspray studies the charts to determine if the metals should now be considered for purchase.

Stocks finished Wednesday on a strong note as the buying increased in the last few hours of trading. The Nasdaq 100 is now getting very close to its breakout level and the A/D line has broken through short-term resistance I discussed in Tuesday’s column.

This is a positive sign and the recently recommended Apple, Inc. (AAPL)—which is a key stock for the tech sector—closed up 1.35%. It has broken through initial resistance and a strong weekly close may set the stage for a further rally on next week’s earnings.

The precious metals were one of Wednesday’s casualties as Existing Home Sales surged 6.1% increasing fears of an early rate cut. This was the best rate since September 2013. In a reaction to the data, gold and silver were down 1.3% while platinum dropped 1.9%. The latest data on New Home Sales data comes out today and February’s data reflected a sharp increase.

My outlook on the metals has been negative since important support was broken last year. In February’s Silver and Gold: A Bear Market Rally? I updated the technical outlook for the metals and concluded that the major trend was still negative.

In last week’s resurrection of Wall Street Week, bond king Jeffrey Gundlach recommended the Spyder Gold (GLD) as his “favorite actionable investment over the next 6-12 months.” Many others are also recommending the metals now, should you also be buying them?

chart
Click to Enlarge

Chart Analysis:  The weekly chart of gold futures shows that it completed a continuation pattern, lines a and b, in early September (point 1).

  • The minimum downside target from this formation in the $1080 area has not yet been reached.
  • The rebound early this year just took prices back to resistance at line b, before it failed.
  • The weekly support, line c, was violated in early March.
  • The recent bounce has just taken prices back to the quarterly pivot at $1210 where the rally appears to have stalled.
  • The weekly OBV broke support last August leading the breakdown in prices.
  • The OBV just recently tested its downtrend, line d.
  • The HPI did move back above the zero line in early 2014 and has formed higher lows, line e.
  • A drop below the zero line will indicate negative money flow.

The daily chart of the SPDR Gold Trust (GLD) shows that it spiked above the resistance at line f, on April 6.

  • Prices reversed the next days as GLD failed to have a weekly close above the quarterly pivot at $116.34.
  • There is even stronger resistance now in the $117.47-$118 area.
  • The volume declined on the recent rally but picked up on Wednesday.
  • The daily OBV peaked in January and now shows a solid downtrend, line g.
  • The weekly OBV is close to dropping below its WMA this week.
  • There is next support at $113.41 with the March low at $109.77.
  • The monthly projected pivot support is at $106.49.

Next Page: Another Gold Miner and Silver ETF to Watch

|pagebreak|

chart
Click to Enlarge

The Market Vectors Gold Miners (GDX) rallied to a high of $23.22 in January which was just below the 61.8% Fibonacci retracement resistance from the 2014 high of $23.48.

  • In March, GDX hit a low of $17.27 which was just above the December 2014 low of $16.97.
  • The rally from the March lows peaked at $20.23 which was just below the 50% retracement resistance from the January highs.
  • There is next support at $18.77, line b, with further at $18.16.
  • A daily close below this level will confirm that the downtrend has resumed.
  • Volume increased on yesterday’s decline.
  • The OBV has formed lower lows while GDX has rallied from the March lows.
  • The daily OBV is back below its WMA and is acting weaker than prices.
  • The weekly OBV (not shown) is still holding above its WMA.

The iShares Silver Trust (SLV) rallied at the start of the year but failed below the multi-year resistance at 17.75.

  • It also started off the new quarter with a Friday close below the quarterly pivot at $16.08 which was a sign of weakness.
  • The rally from the March lows just slightly exceeded the minor 61.8% retracement resistance at $16.51 before SLV again turned lower.
  • The weekly chart shows good support now at $14.64, line e.
  • The quarterly projected pivot support is at $13.02.
  • The downside target from the weekly trading range is in the $11.50-$12.00 area.
  • Volume has been low over the past few weeks suggesting there has been no heavy selling yet.
  • The weekly OBV has just broken the support at line f as it has been below its WMA for the past two weeks.
  • The daily OBV (not shown) has dropped below the March lows and is leading prices lower.
  • The declining 20-day EMA is now at $15.61.

What it Means:  The rally in early 2014 was impressive enough to pull traders into the market, but the failure reinforced the negative signs from the weekly and monthly technical studies. There are still no signs of an important bottom.

The seasonal tendency in the gold futures, using over 30 years of data, is for the metal to bottom in the summer, but last year, prices peaked in July. Before you use seasonal analysis, be sure the technical studies agree.

The selling Wednesday appeared to be in reaction to the view that the strong housing data will mean an early rate hike. For most investors, basing your decisions on the macro trends is not a winning strategy.

How to Profit: No new recommendation.

Related Articles on ETFS

Keyword Image
The Omen
12/07/2017 10:50 am EST

The probability of an equity market correction over the next few months is slim to none, so there co...