Technical Ananlysis – Gold and Commodities

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Hank

 

There are many traders who follow the movements of an investment by using trend lines and other “technical” tools.

I recently received a report from a company that using these tools.

The company is suggesting that commodities are set for a fall and that gold will plunge.

I don’t ascribe to the theory. I do think that, since it is not an absurd way of looking at the prices of stocks that it should be presented.

Let’s start with a chart of the Power Shares Deutsche Bank Commodity Index Tracking Fund(NYSE:DBC), one of the more popular and liquid ETFs on the market, and, for our purposes, a reliable gauge of movements in the broad commodity sector.

 

 

We start by noting that all the stock’s moving averages are unfurled and trending lower – a bad sign.

Also a head and shoulders top (in blue) with the neckline broken three weeks ago occurred at the same time that a longer term trend line (in red) was also broken.

Strike two.

Third, and perhaps most damning, support was undercut just two weeks ago when the stock hit a new 52 week low at $25,

At that point we were all but assured lower prices from the commodities and understood that any bounce higher in the interim would be of a temporary nature only.

And yet…

If there’s a ray of hope for those still bullish on commodities, it resides in the currentRSI reading (black square, at bottom). Whereas both RSI and MACD indicators have been on-and-off underwater for two and a half months now, RSI just peeked its head above the surface in the last two trading sessions.  And this comes at a time when price action has also risen to the junction of the head and shoulders neckline and the short term moving average (red circle, at right).

If there’s to be any hope for commodities over the mid- to long-term, DBC will have to rise above this level and stay there.

And the chances of that happening are very slim.

We look for an almost immediate breakdown in DBC to occur that should bring the stock some twelve to eighteen percent lower in the next three to six months and believe the lion’s share of that drop will occur very quickly once the existing lows at $25 are taken out.

 

We also believe there’s money to be made playing the broad commodity slide.  But we’re not going to do it using an index tracker like DBC.

Very simply, there will be segments that crash, others that hold up and a few others that even climb, given the manifold forces at work in the commodities pits at any given hour on any given day.  So we’re going to focus once again on the sub-sector that we believe stands to take the harshest beating.

It’s without any pleasure that we return to what’s now become our three year old whipping boy, gold.

Please take a look at the daily chart for gold proxy, the SPDR Gold Trust (NYSE:GLD), for the last six months –

 The picture here is fairly simple.

1)     We have a head and shoulders top that’s just millimetres from a breakdown (in blue).

2)      We have old lows sitting just a hairsbreadth below that level – a 4% decline away(in black) – a target which, if reached, would set off a manic bout of selling in the gold pits.

3)      We have RSI and MACD (red squares) trending below their respective waterlines, a bearish indicator that doesn’t look like it’s about to change direction.

4)      And we don’t see any solid support emerging until GLD $110, a stopover that we now expect to reach sometime around New Year’s – if not before.

 

Look also at the longer term, weekly chart –

 

Here, there are also some ominous signs, foremost among them 1) two declining moving averages, including the all-important 137 week MA, 2) both RSI and MACD indicators sub-waterline, and 3) no sign whatsoever of panic in the volume figures.

That last bit is crucial.  Until we see a massive turnover of shares, we can’t consider a full-on long position in GLD or any other precious metal stock.  It makes no sense to do so.  A short term decline of a week or a month, or even four or five months might be reversed without a massive capitulatory event.  But after close to three years of declines, forget it.  You will not see higher gold prices until daily average volumes at least double from today’s levels.  Period.  And as we see no sign of that in the charts today, we don’t expect it to occur for at least another eight to ten weeks.

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