Monday, March 17, 2014

Gold and it's 2 years of abuse.

August of 2011 saw gold reach $1900/oz and from there it has been all down hill.  Gold and Gold miners got taken to the woodshed.  Miners lost 75-90% of there value and some have gone bankrupt.  But as the dust settles where do we go from here?

Gold itself has made a nice double bottom at the 1180-1200 region right around this past Christmas.  This formation has been holding so far and price has rallied up to just south of 1400 now, making Gold the best performing asset class of 2014 so far.   Now, let me tell you what I SEE, and then I will tell you what I THINK.

Near the end of February, Gold hit 1340 while silver hit 22 and the GDXJ hit 44.  In the 3 or so weeks that followed, Gold has risen to a high of 1390, Silver has FALLEN to 21.20 and the GDXJ is now at 41, after breaking higher up to 46 last week than losing it all.  This is not normal or good action for Silver and the miners.  In a strong bull move, we should see silver outperform gold, and the miners lead and outperform both metals.  The fact that there is a divergence like this tells me a number of things.  First, Gold is still safe haven asset class numero uno.  The money finds, and likes gold the most.  Second, the constant "drifting higher" of Gold is telling me that the majority of this move is mostly short covering, and therefore not sustainable.  As the people who got caught with their pants down rush to cover the positions that have left them vulnerable, unless we see them open new longs as well, (Which we are not seeing in any sizable amount) Then this rally will have an expiration date.   The more price conscious Asian buyers that began this rally are looking at a move higher of $200 dollars in 2 1/2 months and are not going to chase this higher.

Buying is looking like it is drying up as gold has fallen back to $1340 and silver is sitting just under $21.  It has been a nice rally, and the miners particularly as judged by the GDXJ, have risen to a high of 46 from a low of 28 at Christmas time.  That about a 65% profit.  Any weaker longs that have been getting massacred  might see this as there breath of fresh air to finally get out.  After 2 years of going down and down, this market is not going to turn on its head and just start going up and up.  No.  After a 65% move higher in the miners, the Bulls conviction needs to be tested.  Where will they come in and buy?  If they begin to see value and enter the market at a higher price than they previously did at sub 30/share, now you have a higher low and possibly the beginnings of a new bull move.  Now, our major support and resistance zones for the GDXJ are at 50 and 35.  There is no reason to think that we wont drift up to 50, the charts look good as far as I can see, I just personally believe that's a tall order to bet on, and it leaves you a hell of a lot of downside risk with only a couple points profit above you, so I wouldn't recommend buying at this level.  Notice the support/resistance zones on the GDXJ on the chart below.

Notice how there is minor resistance where we are here at 45, but the Major areas we are bouncing off of are 50 and 35.  I believe we will either cease moving higher now and move to test the 35 level, or we drift higher to about 50 and move lower from there to test the 35 level a week or so later.  I have highlighted a few key points on the chart above.  First we can see at the top that RSI has been drifting lower as price moved higher, this is negative divergence and could spell out a correction coming.  Secondly, we can see that the 10 day MA is about to cross below the 20 day MA.  I use EMA in the 10 and 20 settings to get a cleaner look at buy and sell points.  When the 10 day crosses above the 20, stay long until the 10 crosses back below it and price falls below both Moving Avgs, And vice versa.  Notice that simple method would have been very profitable from both sides of the market on the GDXJ in the past year.  Thirdly, I am using what is called a Heiki-Ashi chart.  To explain what the difference between this and traditional candle sticks would take forever so lets just say this, it uses an avg of the current period to again, smooth out the noise in the market so you can hear whats going on.  The result as you can see, is that when price is moving down, all candle sticks are red.  When there begins to show some white candles for a few days, typically that means the decline has halted, and you can now look for a buy signal to get in.  When the move higher halts and the candles begin turning red again, look for your sell signal to get out.  This has been a simple yet effective strategy so far.  

As you can see the breakout higher on the GDXJ was rejected.  The candles have now been red for a few days and looks to possibly break support near 40.  MACD is trailing lower and getting close to the zero line.  Stochastics looks similar to RSI, trailing lower.  Likely we will see the Moving avgs cross down lower, support at 40 break, MACD cross below the zero line, and Stochastics go oversold all at once.  That will be a very accurate signal that we are headed lower. The 34-36 area, (We can call it 35) is the strongest support.  Regardless of what level we go to, look for a strong move from the bulls at support as we dip.  That will probably be the area you want to buy into.  The chart below is how I think this will play out over the course of 2014.

If this prediction is accurate, being able to get in at 35 on this pullback will double your money by the year end as this massive inverse Head and Shoulders bottom breaks out.  I believe this is indeed the final bottom.  The mother of all bottoms.  We are getting ready to soar, but be patient.  The damage done over the last 2 years will take a while before it begins to correct.  Accumulate long term positions on the pullbacks and look for the signals I explained for clear entry and exit points

-Jonathan M Mergott

No comments:

Post a Comment