Monthly Charts Still Bullish on Gold

09/05/2011 9:00 am EST

Focus: STRATEGIES

A look at the monthly charts points to most of last month’s trends continuing…gold and Treasuries have more upside, while oil and the dollar index are still flashing negative.

Last month, I suggested to another trader that the monthly charts had shifted to showing gold ready to move higher in the coming months, along with US Treasuries, with crude oil and the US Dollar Index biased to the downside.

The Shanghai Composite and emerging markets were set to slowly drift lower in a sideways consolidation. Volatility was on the edge of a break higher at a critical level. A move above 28 would signal regime change, while a fall back meant more of the same.

This was reflected in the equity indexes as well, with the SPY, IWM, and QQQ all consolidating with indicators starting to point negative, but holding in their ranges. A catalyst that pushes them higher could lead to a major rally. The QQQ is the strongest of the Indexes as of the end of July.

Gold and Treasuries held true to the charts and moved higher—a lot higher—while the US Dollar Index and crude oil consolidated. The Shanghai Composite and Emerging Markets also drifted lower, as anticipated in the charts. Volatility took the high road and held higher all month, concurrent with a move lower in the equity-index ETFs. We had a month that was true to the technicals.

How does the month impact the longer-term picture? Let’s look at some charts.

Gold:

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Gold broke above the rising two-year trendline resistance and did not look back until it ran near the ten-year resistance line at 1917.00.

The Relative Strength Index (RSI) remains elevated, but under 80, and the Moving Average Convergence Divergence (MACD) indicator continues to move higher. These indicators along with the Simple Moving Averages (SMA) sloping higher and volume increasing point to more upside for gold in the coming months.

Support for any pullback now stands at 1720 and 1550 below that, while a move over 1970 resistance may slow it down.

NEXT: West Texas Intermediate Crude Oil

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West Texas Intermediate Crude Oil:

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Crude oil printed a hammer candle this month, a possible reversal if confirmed higher, giving hope that the short move lower may be ending. But the RSI continues to look lower as it hits the mid line, and the MACD is about to cross negative, both suggesting more downside to come.

The upside should be capped by the overlapping Fibonacci levels between 95.36 and 96 if it can get above the upper median line of the bearish pitchfork. Downside support comes first at 84.10, and then 79.12 and 74.43, before strong support at 71.

The US Dollar Index:

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The US Dollar Index continued its series of tight dojis after breaking the symmetrical triangle lower in March. The RSI continues to linger near 40 as the MACD stalls in negative territory. Both give no guidance for the future. The SMAs continue to slope lower, adding to the understanding that the trend is still lower.

Any upside should be capped at a retest of the triangle near 77.50, and the downside support levels of 73 and 71.50 are the only thing between it and targets of 52 and then 40 on Measured Moves (MM) out of the triangle and from the 120 top in 2002.

NEXT: iShares Emerging Markets Index

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iShares Emerging Markets Index:

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The VIX (Volatility Index):

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The Volatility Index looks to have printed an interim double top at 48.22 this month, with a long upper shadow similar to the other topping candle.

With the Bollinger bands expanding, it could be prepping for more upside. If so resistance should come at 35, and then the previous top at 48 followed by 60.

But it appears more likely that the longer-term move will be lower, with support at 25.50 followed by 22.30 and 20.50. The charts above give a mixed view on the future of the VIX, so keep watching.

NEXT: Spyder Trust (SPY)

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Spyder Trust (SPY):

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The SPY continued down along the upper median line of the bearish red pitchfork during August, printing a long-bodied red candle with a long lower shadow, technically a hanging man since the long uptrend.

The RSI pointing lower and the MACD heading towards a bearish cross negative suggest more downside to come. Any move higher over 123 can expect resistance at the upper median line, near 131.20, and then 136.62. Support on a continuation downward comes at 118.50, and then next at 116 and 114 before 108.77.

The monthly outlook suggests the upside for gold will continue, while the trend lower for crude oil and the US Dollar Index will also continue. Emerging markets look to continue their move lower. Volatility can go either way but looks to remain above the lower range experienced in the last six months, with the VIX in a wide range between the mid 20s and 48.

As I have always noted, there is room for some short-term upside without breaking the downward bias. Use this information to understand the long-term trends in equities and their influencers as you prepare for the coming months.

Greg Harmon can be found at Dragonfly Capital.

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