Gold: Ain’t No Cure for the Summertime Blues!

07/21/2010 12:01 am EST

Focus: COMMODITIES

Yes, most experienced gold traders and investors already know that the metals tend to be very weak during the summer months, with gold typically making a yearly low (more often than not) sometime during the July-to-August period. In a similar vein, gold bulls (both new and old alike) have become conditioned to expect such seasonal declines to provide one of the easiest and lowest-risk long entry setups of the entire trading year, especially given gold’s penchant for making substantial bullish runs from late-August/early-September to early/mid-October that can frequently add a great deal to their net worth. There is also another bullish period in the gold market, this one going from early-November to the end of the year. This year is no different…or is it?


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Above, witness the daily continuous chart for gold; the entire period since the early-May 2010 swing high was made is literally screaming to investors:

“Distribution! Distribution from the strong hands to the weak hands is underway; wait for a much better buying opportunity at major support before buying!”

Here’s why:

  • Large speculators (AKA hedge funds) have been holding record numbers of long gold futures contracts, and with prices already having begun their anticipated turn south for the summer, these “smart money” traders and investors are counting on the weak hands to step right up to the plate and take their overinflated gold futures position off of their gold-dust-stained paws, preferably in an aggressive manner, convinced as they are that this current selloff just has to give way to yet another mega-bullish run in the metal, starting in about four to six weeks or so.

  • On the technical side of the equation, the recent plunge beneath the 50-day exponential moving average (EMA; see green line on chart) is another indication of a possible trend change for gold. Notice that this important delineator of intermediate-term trends is also sloping downward, another bearish omen. Right now, gold is perched just above the Fibonacci 38% retracement of the February-to-June upthrust in the metal. If you see a daily close below $1,179 (for the front-month gold futures contract) on above-average range and volume, consider that your invitation to welcome gold as it hits the next minor support level (comprised of a prior swing low and the Fib 50% retracement level; see the pink shaded area on chart) at around $1,155 or so. But don’t use that price as a buying opportunity (unless you’re a skilled intraday trader). Instead, see if that level breaks too, because if it does, there is major daily support near the $1,130 area, and it’s a biggie, comprised of the all-important 200-day EMA (which will frequently act as a de facto support level all by itself), the Fib 62% support level, and the April swing low (see the green shaded area on chart).

  • There is also a very nice A-B-C corrective pattern underway on this daily chart, and given the way most of these patterns play out in various financial markets, it almost looks as if gold is already well on its way to completing a “C” wave that will ultimately terminate somewhere near $1,125 and $1,140.

  • At the bottom of the chart, the Aroon (14) trend intensity indicator has already moved solidly into bearish mode, which is yet another warning that gold may have room to fall further.

  • The literal flood of “buy gold” ads on TV, the Internet, and in newspapers also seems to be a very big canary in this very big gold mine. With credit availability in the economy still at 1930’s levels, it seems that deflation is a much greater threat to the global economy than inflation. Of course, the price action on the chart is the ultimate arbiter in the inflation/deflation debate, but it does seem that there are more than a few reasons to be cautious about betting on a major year-end rally in the gold market this year.

Ok, that’s one technician’s take on the most obvious fundamental and technical aspects driving the price of gold right now, but what happens if we do see the $1,130 area acts as a temporary springboard, one that might allow gold the luxury of a retracement back up toward the underside of its 50-day (currently near $1,205) EMA? I say this: Look for a suitable reversal and then for a long entry trigger after a proven test/retest of the north side of the 200-day EMA and go long in the gold futures, GLD, or even shares in GDX (the ETF that tracks the major gold stocks) using the underside of the 50-day EMA as your obvious “get out” price target. You might try placing your initial stop near the 200-day EMA and then trail any subsequent gains with a three-bar trailing stop of the daily lows, just in case gold decides that it wants to head down south a bit more quickly than anticipated.

If you’re a buy and hold gold investor, my sympathies go out to you, because one day—one bright, beautiful, sunny day—gold is going to make its ultimate high (Or has it already? Hmm…) just prior to plunging by $50, $75, or even $100 per day, for days on end, even as all of the “Buy the dips” crowd screams “Back up the truck!” Do you have a plan of escape in place for when that day arrives, or are you going to trust the dude with the $99 newsletter to hold your hand instead? Do yourself a favor and have some kind of profit-taking and/or trailing stop in place so you at least have some personal protection before such a momentous event in the precious metals market occurs. Or even better, why not sell your buy and hold gold now, book a decent profit, and then learn to selectively swing trade gold stocks (long and short) or even GLD, the ETF that tracks the price of gold? You’ll have a lot less to worry about, including the worry about whether the people shouting for $3,000 gold are right or wrong. If they’re right, great, but if not, your worries will only increase as you agonize over selling your gold coins or bullion back into a plunging market.

Buy and hold is dead, only (skilled) traders get ahead. Get used to it!

A final word of caution here—don’t bet the farm on any single chartists or advisor’s opinion, but learn instead to separate the wheat from the chaff and start to apply some of the enduring, time-tested principles of profitable trading and speculation to work in your own portfolio, whether it holds gold or not. Learn to rely on the two good eyes that the good Lord gave you as you analyze your charts and you may be able to write a lot of dubious financial advice off before it has the chance to play havoc with your trading and retirement accounts.

By Donald W. Pendergast Jr. of ChartW59.com

Donald has been trading/investing since 1979; since 1999, he has been developing stock, ETF, and futures trading systems using various system development platforms, including Metastock and TradeStation. He currently has two futures trading systems available for subscription at Striker Securities in Chicago, IL. He relaxes by grinding out riffs and blues solos on his 1976 Gibson Les Paul.

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