Gold and Gold Stocks  – Technical Conditions

There have been a number of noteworthy technical developments in gold, none of which are bearish. Although it is still not possible to sound the 'all clear', there are now a number of signs that the April crash low may in fact have been an important medium to long term low.

Let us first look at gold itself. As the daily chart of the August contract shows, gold has begun to rise on expanding volume after the successful test of the crash low. It is a good bet that recently added short positions are now being covered due to the contract's failure to break to new lows. At the same time we can see that a number of strong resistance levels are still overhead. These will have to be overcome in order to adopt an unequivocally bullish stance from a purely technical perspective.



Gold,daily August contract-annot
Gold, August contract daily – a strong rise on expanding trading volume following the successful retest of the crash low. The red lines indicate overhead resistance levels.




Zooming in a bit on the shorter time frames, we can see that an attempt to sell gold down again after the initial rise to the $1,400 level has been negated by the most recent price action. Newly established shorts are being covered, and there are probably also new long positions being established, as indicated by the recent action in gold stocks (more on that further below). Note that when we talk here about short covering and the establishment of new long positions we refer exclusively to the activities of speculators.

What's more, the recent advance does appear to be an impulse wave.





gold, aug, one week
Gold, August contract, 30 minute candles. On May 28 an initial foray to the $1,400 level was rebuffed – the subsequent break through this level has seen an expansion in trading volume, indicating that newly established short positions are covered again. The advance moreover has an 'impulsive' look to it.



However, what really constitutes very good news in our judgment is the recent action in gold stocks. As we have frequently pointed out, since the gold stocks have led gold to the downside, it is very important that the ratio of gold stocks to gold turn up and that they begin to lead to the upside in order to be able to be confident of a trend change.

Tentative evidence of a change in character has arrived on Wednesday already and Thursday's action has cemented it further. On Wednesday gold stocks rose strongly from a higher low, even while gold only advanced hesitantly. On Thursday the opened with an upside gap, leaving a large 'island' behind. It is possible that we have witnessed a genuine island reversal (unless the gap is soon closed again). If so, this would be excellent news indeed. Island reversals are very powerful technical patterns: they indicate that the market's assessment has shifted by 180 degrees.

Note also that the technical divergences between prices and momentum oscillators we have previously pointed out seem to have 'worked' this time. In terms of the HUI, the next major resistance level is the gap between approximately 290 and 300 points. If the index overcomes the 300 level, it will further buttress the notion that a major trend reversal has occurred.



The HUI puts in an island reversal. Note that the island comprises almost two weeks of trading activity, which makes this an especially noteworthy event. The gap between 290 and 300 is the next major resistance level that the index needs to overcome.



Hui-Gold ratio

The HUI-gold ratio begins to rise from a higher low. Note that the preceding decline has lost momentum since mid April.



Sentiment Update

There have also been a number of interesting developments on the sentiment front. It is well known that on an anecdotal basis, sentiment is in the gutter. The financial media, mainstream analysis as well as internet discussion forums are brimming with bearish forecasts. This is reflected in quantifiable sentiment data as well. What makes recent developments so interesting is that the sentiment data have begun to diverge from the price action, something that is frequently seen prior to trend reversals.

In this context, note also that the Hulbert Gold Newsletter Sentiment Index(HGNSI) has put in a new all time low. On average, newsletter writers recommend a 44% net short allocation to gold. This unprecedented level of bearishness is belied by the price action, as gold has so far failed to break  to new lows. 

The same can be seen in sentimentrader's 'public opinion' index, which merges  a number of popular sentiment surveys.



Gold-public opinion
The 'public opinion' index on gold diverges markedly from gold's price action.



The HGNSI makes a new all time low of nearly minus 44% – this means that gold timers recommend a 44% net short exposure to gold on average.




Gold bulls are not out of the woods yet. There are strong technical resistance levels that it will need to be overcome before one can turn unequivocally bullish. However, there are now strong sings that the mid April crash low may indeed have been a major medium to long term low. What argues in favor of this idea is inter alia the fact that the April low was put in amid panic volume and was later successfully retested on lighter volume (according to Tim Ord's technical method, this is a very strong bullish signal).

Moreover, the action in gold stocks is beginning to look quite constructive. They previously led to the downside and may now finally be in the process of beginning to lead to the upside. The main caveat is that the reversal is still young and therefore not yet definitive. In short, many things can still go wrong. Nevertheless, we do now at last have a number of signals in place that have in the past often indicated that a major trend reversal was at hand.



Charts by: BarCharts, StockCharts, Sentimentrader




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5 Responses to “Gold Update, Part Two – Technical Conditions and Sentiment”

  • jimmyjames:

    Why? Because bond yields are showing an inverted Head and Shoulders pattern, pointing to higher yields ahead.


    Gold and bonds have been mirroring each other since at least 01- I wonder what the chances of a decoupling are- safe places are getting scarce-

  • SavvyGuy:

    On a log chart, the April 12-15 crash stopped just at the rising trend-line from 2005 and 2008. The re-test on May 20 also stopped at this trend-line, albeit at a higher low due to the positive slope.

    A large amount of sell-side energy was expended in April/May, and buying interest is picking up recently. However, I strongly suspect that the next bout of selling from a higher level will punch through the rising trend-line. Why? Because bond yields are showing an inverted Head and Shoulders pattern, pointing to higher yields ahead.

    • rodney:

      Under normal conditions, i.e. an unhampered Treasury market, I would argue the opposite: rising yields signal higher ‘inflation’ expectations, which is bullish for gold.

      However, I would hesitate to read too much into it right now as the market is far from normal with the Fed’s massive interventions. See also the recent post “keeping an eye on treasuries” for an explanation of convexity selling in this market, which may also be distorting the picture.

  • jimmyjames:

    Gold bulls are not out of the woods yet. There are strong technical resistance levels that it will need to be overcome before one can turn unequivocally bullish.


    A nasty short squeeze would likely blow lower resistance levels away quite easily-
    Fundamentally- ie: bearish reports by paid for/bribed/threatened/clueless gold analysts have to be taken as a bottoming-
    I love to be hated by such idiots-
    Buying GDXJ here-

  • Keith Weiner:

    Without commenting on the technical arguments, I would just add that during May the June contract was rolled over to August and that would cause rising volume in August. It would be better to look at changes in the sum of the volume of all contracts.

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