Friday, September 27, 2013

Before You Get Too Bullish on Gold, Look at This Chart

Gold is rallying today on news that A) the Fed might not taper until 2014 and B) the Republican leadership has focused on the debt ceiling, "strapped a bomb" to their collective chest, and are making a "Dear Santa" list of demands.

Meanwhile, for his part, President Obama "understands that he cannot repeat his blunder of 2011, when he mistook the GOP’s debt-ceiling threat for an invitation to engage in normal fiscal bargaining."

Worried that this time they really mean it, Wall Street is selling stocks and buying gold.

The sell-off/pullback in stocks should play out pretty much the way I laid out in this post on September 18.  My view on the major stock indices hasn't changed. But what about gold?

(Updated chart)

Looking at a chart of the SPDR Gold Trust (GLD), which tracks gold closely, you can see that gold broke down from its uptrend earlier this month. It rallied hard on the news that Ben Bernanke wasn't "tapering" Quantitative Easing, then has slowly given all those gains back. Its rally today is within the parameters of a pennant pattern.  Pennants are continuation patterns, and "fly at half mast."

The likelihood is that when the Debt Ceiling Crisis in Washington is resolved, gold will break down lower out of the pattern and perhaps find a new, lower base.

Also note that the 20-day moving average is about to turn lower through the 50-day moving average. This tells you all you need to know about short-term momentum.

So, I expect we'll see a deeper correction in gold. It doesn't have to work that way -- some new development could send gold much higher. But if things work out the way I expect, then that next leg down will probably be a great buying opportunity.

Why? Because all the long-term bullish forces in gold's favor remain in place.

Also remember the old Wall Street saying, "when it's the best time to buy, you won't want to."

You can draw your own conclusions. You're in charge of your own investing destiny.  Good luck, good trades, and have a great weekend.

I'll be in Baltimore next week. I hear they have Internet connection there in the Big City, so I should be posting.

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