Getting Technical
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WEDNESDAY, DECEMBER 19, 2012
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Gold Shines Brighter in the Charts
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By MICHAEL KAHN
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Gold and gold-mining stocks have had a rough two months, but don't count them out just yet.
Just a month ago, gold looked ready to head back to its old highs following a short-term technical breakout and resumption of the long-term trend (see Getting Technical, "The Trend is Gold's Friend Again," Nov. 26). Then concerns over global deflation knocked the market down hard, negating the breakout and sending prices tumbling.
From analyst calls for gold to drop to $1,200 per ounce to a general feeling in technical circles that this market has topped, the metal's future seems dull. But in any market, the more bearish the sentiment, the more likely that market is close to a bottom.
And according to a sentiment survey by Jake Bernstein, veteran trader, author and proprietor of Trade-Futures.com, sentiment is bearish indeed. He polls traders each day and tracks their responses over time. As of Tuesday, his Daily Sentiment Index (DSI) registered a bullish opinion of just 9% on a scale from zero to 100.
"Based on previous DSI readings," he said, "it is low enough to signal at least a recovery in store for gold."
Indeed, over the past year, each time sentiment was this low, gold rallied for anywhere from four to sixteen weeks.
Let's look at this in the context of the charts. While the long-term trendline from the 2008 low remains intact, it appears that the market is better analyzed in the context of a trading range from late 2011 (see Chart 1).
Support, or a price floor, is roughly at $1,530 and resistance, or a price ceiling, is roughly at $1,800. For the SPDR Gold Trust(ticker: GLD) the equivalent levels would be $149 at the bottom and $174 at the top. With gold trading at $1,672 and the gold exchange-traded fund trading at $161.72 Wednesday afternoon, they are in the middle of their respective ranges.
![[image]](http://barrons.wsj.net/public/resources/images/ON-AZ518_bGTCht_NS_20121219153012.jpg)
One indicator I like to use in a trading range is stochastics, which measures an asset's position and how fast it is moving within that range. At gold's each low within the range, stochastics reached "oversold" conditions and then began to rise. It basically means that the sellers were exhausted and the buyers were becoming more active.
Interestingly, stochastics lows coincided with sentiment lows. Fast forward to current trading and stochastics is approaching oversold conditions in step with a very low DSI reading. In other words, conditions are at or close to where we would expect them to be when buyers get active again.
To be sure, oversold conditions can become more oversold and sentiment can become even more bearish. But historically, the combination now in place has provided a reasonable argument for a bounce in the market.
Gold-mining stocks are also still alive technically although for a different reason. The Market Vectors ETF Trust Gold Miners(ticker: GDX) has been sliding since early September and is now below both its key 50- and 200-day moving averages (see Chart 2). While the short-term trend is down, the pattern for the year has really been a choppy sideways range.
![[image]](http://barrons.wsj.net/public/resources/images/ON-AZ519_GTCht2_NS_20121219153039.jpg)
But beneath the surface, one technical indicator shows that demand for the ETF has not waned. On-balance volume, a study that keeps a running tab of how much volume trades on up days and down days, has held its ground throughout the September to December price decline. In technical analysis, when prices fall and indicators rise it usually means that the price trend is going to change for the better.
I find it interesting that most individual gold-mining stocks, such as Newmont Mining(NEM) and Goldcorp (GG), do not sport rising on-balance volume studies. In my view, investors are eager to own gold stocks but are unsure enough that they prefer to diversify with an ETF.
Gold and gold-mining stocks took a hit over the past two months and may not have seen their respective lows just yet. But sentiment and several technical indicators suggest that those lows are near. Despite the growing fear that gold and gold stocks have topped for good, the evidence does not quite agree.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
From analyst calls for gold to drop to $1,200 per ounce to a general feeling in technical circles that this market has topped, the metal's future seems dull. But in any market, the more bearish the sentiment, the more likely that market is close to a bottom.
And according to a sentiment survey by Jake Bernstein, veteran trader, author and proprietor of Trade-Futures.com, sentiment is bearish indeed. He polls traders each day and tracks their responses over time. As of Tuesday, his Daily Sentiment Index (DSI) registered a bullish opinion of just 9% on a scale from zero to 100.
"Based on previous DSI readings," he said, "it is low enough to signal at least a recovery in store for gold."
Indeed, over the past year, each time sentiment was this low, gold rallied for anywhere from four to sixteen weeks.
Let's look at this in the context of the charts. While the long-term trendline from the 2008 low remains intact, it appears that the market is better analyzed in the context of a trading range from late 2011 (see Chart 1).
Support, or a price floor, is roughly at $1,530 and resistance, or a price ceiling, is roughly at $1,800. For the SPDR Gold Trust
Chart 1
Gold One indicator I like to use in a trading range is stochastics, which measures an asset's position and how fast it is moving within that range. At gold's each low within the range, stochastics reached "oversold" conditions and then began to rise. It basically means that the sellers were exhausted and the buyers were becoming more active.
Interestingly, stochastics lows coincided with sentiment lows. Fast forward to current trading and stochastics is approaching oversold conditions in step with a very low DSI reading. In other words, conditions are at or close to where we would expect them to be when buyers get active again.
To be sure, oversold conditions can become more oversold and sentiment can become even more bearish. But historically, the combination now in place has provided a reasonable argument for a bounce in the market.
Gold-mining stocks are also still alive technically although for a different reason. The Market Vectors ETF Trust Gold Miners
Chart 2
Gold Miners ETF But beneath the surface, one technical indicator shows that demand for the ETF has not waned. On-balance volume, a study that keeps a running tab of how much volume trades on up days and down days, has held its ground throughout the September to December price decline. In technical analysis, when prices fall and indicators rise it usually means that the price trend is going to change for the better.
I find it interesting that most individual gold-mining stocks, such as Newmont Mining
Gold and gold-mining stocks took a hit over the past two months and may not have seen their respective lows just yet. But sentiment and several technical indicators suggest that those lows are near. Despite the growing fear that gold and gold stocks have topped for good, the evidence does not quite agree.
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