DEATH CROSSES EVERYWHERE; TIME TO BUY GOLD YET ? / BARRON´S MAGAZINE

Getting Technical

Death Crosses Everywhere; Time to Buy Gold Yet?

Even as stocks have gotten pummeled, gold has gone nowhere. Here’s what the charts tell us now.

By Michael Kahn

Updated Sept. 2, 2015 5:12 p.m. ET

As stocks get clobbered, it is surprising to many, me included, that gold is the yellow-headed stepchild of the investment world. When there is fear on Wall Street, gold is supposed to shine.

But it is down this year, and the charts suggest it has further to fall.

With big corrections always possible along the way, the cardinal rule for investors is that trends persist until something comes along to undeniably change them. OK, that’s not a ground-breaking observation — the trend is your friend — but it’s worth looking at trends, which are down for both gold and stocks.

There is a lot of chatter now over moving-average death crosses in the stock market, and rightly so. Keep in mind that these moves — when the 50-day average is sliding below the 200-day average — are useful indicators, but not necessarily sell signals. The first index to succumb was the Dow Jones Industrial Average (see Getting Technical, “Dow ‘Death Cross’ Stirs Anxiety in Fragile Market,” Aug. 12). The Standard & Poor’s 500 buckled last week (see Chart 1) and the S&P 400 MidCap Index crossed on Monday.

Chart 1

Standard & Poor’s 500

Wednesday, the small-capitalization Russell 2000 joined the group, leaving only the Nasdaq standing alone among major indexes without this dreaded signal.

Does it matter that the Nasdaq is defiant? Not really. What matters is that stocks of almost every type across the globe are trading below technical metrics that even casual users of charts believe makes them unattractive. Sure, some popular stocks may seem to offer fire sale pricing when compared with where they were just a month ago. But we have to get back to the cardinal rule — trends persist. Low prices now can become even lower later.

There is nothing on the charts that suggests otherwise. Support levels have crumbled. Leadership is gone, and that includes standouts such as Apple  and Netflix. Last month I wrote that these two leaders and a small group of others, held the key (see Getting Technical, “Apple Technicals Are Ugly and Could Sink the Market,” Aug. 5). The group is now broken.

And that brings us to gold. Even as stocks drifted lower in August, gold did very little. It only managed what looked to be a dead-cat bounce. This was to be expected after a bout of selling in July that seemed to mark capitulation in that market (see Getting Technical, “Gold Is Falling So Hard It Looks Like Capitulation,” July 20).

Gold did manage to climb about 7.5% from its depths, but it got a lot of help from a weakening dollar. The greenback fell 5% from high to low in August, but has since come roaring back.

Gold’s bounce looks to be over and a major support level is starting to call (see Chart 2).

Chart 2

Gold

Gold’s multiyear bull market stalled in 2007 before finally breaking out again in 2009. While I usually find no hard technical value in round numbers, key resistance back then was $1,000 per ounce. (See Getting Technical, “Gold Has More Upside,” Oct. 7, 2009.) Looking at a long-term chart, the difference between current trading in the $1,135 area and that key level at $1,000 is not that much. An 11% decline from here in the context of a 47% bear market from the 2011 peak is not much more than a final wiggle.

I am not saying gold will fall to $1,000, but if it does I can see a lot of buying unleashed at prices not available for six years. And if it does move down there, it should be the final blow to the psyches of the last remaining bulls. Nobody will dare espouse a bullish view for fear of ridicule, and that will be the final capitulation in sentiment.

But for now, gold had its chance to recover last month and failed. The breakdown in stocks is young, but trends in both are still to the downside. That means investors should avoid both for the time being.