In Like a Lion and Out Like a Lamb: Gold

[UPDATE: THE SILVER VERSION OF THIS POST IS NOW AVAILABLE HERE.]

The old English proverb of 'in like a lion, out like a lamb' to describe the weather in the month of March seemed to fit equally well the markets this year.

The stock markets started the month with real strength, before going on to give up a good chunk of their Q1 gains and then pulling back some of these gains right at the end of the month (the S&P500 being an exception to this, as it performed solidly throughout March). The PMs started in a similarly fierce manner: Gold closed on 1st March at $1725 and silver at $35.50, before they cratered later in the month to $1625 and $31.25, respectively, and then climbed back to close the month at a timid $1668 and $32.28.

A lot of this can be attributed to end-of-quarter portfolio reshuffling (and in the UK the end of March is also the end of the tax year), but there was also renewed nervousness about the state of the world economy, with Chinese data disappointing many economy bulls. So what's next for the markets (both PM and non-PM) and will April finally be the month when PM bulls start to get paid?

I'm going to break this down into a few posts, I think, as it's a big subject. This is the one for gold (the one for silver is now available here). Let's go to the charts...



The gold lamb looks like it's about to become a lion again

The centre of attention on the gold daily chart has been the gigantic inverse head and shoulders pattern which looks like it's getting ready to rock and roll. I wrote about this beautiful inverse head and shoulders a couple of weeks ago, and there's nothing on the chart to suggest that the formation is out of play yet. The right shoulder looks like it's either completed, or is very close to completing.

One perennial problem with H&S and IH&S patterns is defining exactly where a shoulder begins and ends (the head is usually obviously defined). There was some discussion of this in the comments on my IH&S post, so I've taken another look at the daily chart. It seems to me that the left shoulder started around 63 (trading) days before the head. We've now had 57 days from the head until today. This suggests strongly to me that the IH&S pattern should be confirmed (or fail! - remember, it can always fail) either next week or the week after, if the symmetry is to be preserved. This would perhaps signal another dip down to test the area around $1625. However, it's quite possible that the right shoulder is already completed, and yesterday's bounce-back is the start of the move towards the neckline that is necessary for an IH&S to be a confirmed IH&S.



Tantalisingly, the 55-dma has just crossed the 144-dma [I will explain the use of these apparently odd numbers for the moving averages in a future post], which coincides with a desperate attempt for the MACD lines to cross also. If both of these indicators confirm their move next week then the game is afoot, and gold could start to make an impressive move higher.

On the weekly chart, I count 13 weeks from the left shoulder to the head and 13 weeks from the head to where we are now, which seems to add further weight to the idea that the IH&S is ripe for resolving very soon. The MACD and RSI indicators also look enticingly bullish:


However, what really caught my eye on the weekly chart is the 'dragonfly doji' which formed last week, right on the long-term trend line. Candlesticks are an important element of technical analysis, and their different shapes and directions can give clues regarding the next likely trending move. Dojis in general are characterised by a tiny candlestick body (sometimes just a horizontal line) which indicates that the stock, commodity, whatever, opened and closed at virtually the same price for the relevant time period (a week on our chart). The long downward-pointing 'tail' (or 'wick') of the dragonfly doji tells us that sellers got ahead of themselves and the selling quickly dried up. On, say, a four-minute candle this would probably not amount to much. But on a weekly chart, this formation is highly indicative of a trending move higher, as the bulls start to take advantage of the apparent absence of sellers.

The fact that the downward trend for gold since February reversed last week (i.e. the week after the dragonfly doji) is a good sign. But even more bullish in my view is the critical fact that the dragonfly doji formed right at the long-term trend line. The two previous times this occurred in the last two years were followed by a remarkable run of around three months in which there were only one or two down weeks for the whole period. Even if history does not repeat itself, the very fact that sellers dried up right at the long-term trend line shows that this gold bull run has some way to go yet.

To put this into a longer-term perspective, let's have a quick look at the monthly chart for gold too. This goes back all the way to 2002, almost at the start of the current bull run. One can see three 'phases' to this bull run, each at a steeper angle (this has been noted before, by my co-contributor, GM Jenkins). We can see that gold is still safely above the phase 3 line, despite its hardships over the last six months, and is miles away from either the phase 2 or phase 1 lines. The very bullish cross of the Slow Stochastic lines seems to imply that a reversal away from this line is likely: should a white candlestick form for April this will be a confirmed 'bounce' off the trend line that has held since the collapse of Lehman Brothers:


Intriguingly, the period between 'phase changes' seems to suggest that we may soon be due for another one. This could coincide neatly with an announcement of QE III or war with Iran or some such. Of course, the bears could equally argue that we're overdue for a return to the phase 1 line, which would put gold somewhere around $1,000/oz. But as the charts are all indicating new upward moves, I personally don't think this bearish argument carries any weight at the moment. Once the trend lines break (this could happen if QE III is overtly ruled out, for example), and we have a 'gravestone doji' rather than a dragonfly doji sitting on the long-term trend line, then I'll be prepared to listen to such arguments.


The gold stocks could hardly be more beaten up

One of the more popular posts on Screwtape this month was that in which I tried to set out the case for gold miners being on the cusp of a major trend reversal and thus a big move higher. At the time of posting, the HUI was flirting with the traditional bottom end of its trading range at about 480. Well, I got a bit of a punch in the gob as it continued on its merry way downwards, all the way to a bottom (so far) of 458 on Thursday 29th March [NB: but it bounced back to 473 on Friday]. This didn't look so much like the HUI was leaving March like a lamb, but rather more like a hamster that had lost an argument with the wheels of a freight train. Good grief - the HUI hasn't been this low since September 2010..!

The overshoot is partly due to the plunge in the share price of Randgold Resources (GOLD on the Nasdaq, RRS on the LSE) following the coup in Mali. Although Randgold is only the ninth most weighted miner of the 15 that make up the HUI, the fact that its shares fell by around 17% had a big (and unexpected) impact on the index in general. But even allowing for this, the HUI's chart is pretty terrible for those who bought miners back in September 2012.

Here's the depressing chart in all its glory:


So perhaps it's not so depressing. My basic arguments, i.e. that sentiment is on the floor, the indicators are beginning to turn upwards from real lows, and the chart formation recalls previous formations that proved to be bullish, all still stand. Weakness in the gold price has allowed the bears to strike further and harder at the gold stocks than I had envisaged. But the elastic band has now been stretched just about as far as it can be, as far as I can tell, and it is not at all apparent who will be now selling these stocks at such ridiculously low prices. This 'drying up' of sellers appears to be borne out by the last two candlesticks on the HUI daily, which are very interesting:


The 'hammer' (a short candlestick body, with a long down tail) is considered very bullish when appearing at the end of a down trend. The fact that it's immediately followed by our old friend, the dragonfly doji, implies to me that this is confirmation of a dearth of sellers at these ridiculously low prices. One can also see the same two candlesticks on the chart of the GDX, and a very similar pair (two hammer candlesticks) on the XAU.

Further, the gold stocks are now hopefully neatly set up to benefit from cyclical rotation from previous winners in Q1 (such as financial stocks) into new performers. So although my portfolio of gold stocks is currently looking pretty unenviable, I'm holding and adding. This is, I hope, a smart money move. It may not start producing immediately, but in a few months' time I hope to be vindicated in my purchasing decisions.


The Platinum/Gold ratio 

I took a look at this interesting ratio a week ago, as it appears that platinum's wrestle with gold to regain its traditional place as the  most precious precious metal had reached a critical point. I'm interested in this ratio as a guide to general sentiment, and have crudely labelled 'platinum bugs' as being bullish on the general economy and goldbugs as bearish. Regardless of the merit or otherwise of that conjecture, the fact that gold is currently still more expensive than platinum suggests to me that gold is becoming more 'valued', which reflects a subtle shift in sentiment towards the yellow metal even in the face of recently falling prices.




On the last trading day in March, platinum had still failed to overtake gold (i.e. the ratio remained at less than 1:1) despite having broken through its 200-dma again. The 'crunch' point will come very soon, as the 50- and 200-dma will meet in the next week or two. If they cross, then I'd bet on platinum overtaking gold as the most precious precious metal, which will tell us something about relative sentiment towards the yellow metal. If they meet, kiss, and move apart again, then I'd bet on the gap between the two metals growing greater. The latter scenario might imply a very strong move for gold, assuming that platinum prices do not fall significantly.


Conclusion

The gold bull may have entered March like a lion and left like a lamb, but every technical indicator I can find is suggesting a strong move higher during April. And there is certainly no technical indication to suggest that the long-term gold bull run is over in any way. All the charts show is that everything is nicely on track.

Whether the gold stocks will follow, is more debatable, as they are heavily prone to events-oriented falls (Randgold being a case in point) and there are certain structural shorts placed upon some of these equities. However, my feeling is that those overambitious bears that had the nerve to take the HUI down to 458 will soon be covering before it gets to 480 (if they're wise) or scrambling to do so once it gets past that point. Assuming gold plays its part, the charts suggest a solid move higher from there for these embattled stocks.

2 comments:

Dan D. said...

Excellent work Jeanne .... I hope you don't mind if I provide the link to my own analysis of last week in which I tried to lay out both the bullish and bearish arguments for the technical overview on both the gold and silver markets. As the title of my own analysis indicated, the charts are exhibiting signs that we are on the cusp of extreme moves and I attempted to lay out key areas that we should be watching for to aid with giving clearer direction.

If you prefer that I don't provide links then please let me know for future reference. I don't want to be perceived as trolling or flaunting my own site.

Here's the link:

http://thefundamentalview.blogspot.ca/2012/03/gold-and-silver-do-extreme-moves-lie.html

I also identifed the inverse H&S in both metals and what struck me was the sheer size of the pattern, perhapsthe biggest such one that has appeared in over 3 years. The significance I place on this is simple ... the bigger the pattern, the bigger the potential move that ensues. I normally use an inversed correlation to the potential move if that pattern is validated.

I laid this out in my post but to be brief, the breakout target is usually equivalent in either dollars or percentage moves.

Using very easy to understand numbers for the purpose of this example, if the Head is at $10.00 and the neckline is at $15.00, if the pattern is confirmed, the first target is usually $20.00. (head to neckline difference is $5.00 so the ensuing move should equalthat difference. The other way to view it is on a percentage basis. For example, the had to neck difference is 50% so, a 50% move from the neckline is usually expected...I find the latter less so, usually noting that the dollar move is the first area of real resistance.

Of course, anything can change the targets. This includes news, geopolitical events, unexpected events etc and as we've seen this past year, even whispers of news or how those whispers are perceived or distorted can often cause moves as well.

The bottom line is that technical indicators and trends should be used for "Trading" purposes only. These should not be confused with underlying fundamentals of any asset. What most novice market players often mistake is the significant difference between an investment or a trade. For example, I invest in bullion during pullbacks ... bullion that remains part of my long-term hold...but I "trade" short term set-ups.

On my own blog for example, nothing riles up the bulls more than when I go short. They fail to note my underlying longer term fundamental goals. There is nothing wrong with going short on technical set-ups even though your core holding remains longer term bullish.

Pardon me for straying slightly off topic but many an investor needs to understand that technical analysis is just another tool and should never be mistaken for fundamental outlooks. I say this because all too often I get hit with the trolls on my own blog who dismiss the power and potential of identifying trade set-ups using technical analysis. I went short gold last fall not because of the fundamentals but because of the technical analysis ... while others were still baging the table for $3,000 gold.

Your post does an excellent job of outlining the current indicators and I agree with you that my bias right now is for the resumption of a move upwards. In my own view, given the sheer size of the pattern on the verge of being completed could signal an extreme move upward.

This was not unlike the last major inverse head and shoulders in the summer of 2010 when silver was trading at roughly $23.00. At that time I called for an extreme move as well based on the size of the pattern. What happened? Silver started a tear that would eventually take it to $48.00.


CONTINUED .....

Dan D. said...

.....CONTINUED FROM PRIOR COMMENT


The pattern I see right now could also be a complex inverse head and shoulders with what looks like, if you look closely, TWO left and right shoulders ... these ones often have extreme moves attached to them. I may be wrong and welcome any feedback by yourself or any other reader.

If I have one concern it is surrounding ratios. Whether it be the gold/platinum ratio or the gold silver ratio. Ratios are historical and there is no firm rule anywhere that implies that the ratio must revert to historical levels or must be at any set ratio number. This is where my beef with the silver permabulls lies when they refer to the historical ratio. I often point out that there is no rule that the lower cost asset must increase to the historical ratio average. What’s to say that the more expensive of the two assets won’t fall to satisfy the historical ratio? Silver permabulls often argue the historical silver/gold ratio as a reason for silver to continue to rapidly appreciate. However they fail to note that gold could easily get clobbered at which time the ratio can still revert to the historical average. I don’t want future readers to imply that this is what I am predicting.. I am merely pointing out an example.

Keep up the good work.
Dan