For over six weeks now gold has been trading in a narrow range with $1750 as support and $1825 as resistance. Last week it tested that $1825 area and looked like it was getting ready to break through it, but on Friday it took a hit after the jobs numbers came out. Gold this morning is trading down in panic selling before the NYSE opening bell, but appears to be rallying into the open for a new bottom. In the end, gold remains stuck in this consolidation range, much like it was back in March when it made a double bottom, as you can see from this chart.
A successful hold of this morning’s low will likely cause a rally back up to $1800 and then a pause before the next move, much like we saw in early April.
There are people calling for a total gold crash and others wondering how could it drop?
There are a lot of people on margin in the financial markets, and others taking riskier bets than there were a year ago, such as buying call options or double or triple ETF’s, or extremely volatile stocks. Many last week bought into HOOD as it shot up and peaked. Last year there were dozens of momentum stock plays for Robinhood type traders to play. Now only one is working at a time. Last week it was HOOD.
One thing happening is that there is actually little overall volatility in the financial markets now. When you look at gold we are talking about a 75 point consolidation range. When markets are less volatile it can make it harder for people to make money trading. Of course, the fact that many fad stocks that make up the Robinhood list are badly lagging the averages now contributes to that. This provokes some who don’t think they can make much in a big cap stock or ETF to try to leverage up their risks to try to make something. I don’t doubt some tried to do that when gold got to $1825 and then ended up selling on Friday.
The good news for gold is that the most important technical timing indicator for it is the GDX/GLD relative strength ratio and it is standing firm as you can see from this chart.
This ratio measures the performance of the GDX mining stock ETF with the metal and tends to act as a leading indicator. When it performs better than gold that is a bullish sign and when it performance worse that is a negative one. It it acting exactly the same way it did in March.
When gold made its double bottom this ratio remained well above it to signal a positive divergence and tip off everyone watching it that gold would likely hold its previous low.
It’s doing the same thing again.
-Mike
