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While gold has its head high in the clouds, punters must keep their feet on the ground
by Simon Griffin
Gold in US$ (London PM fix)
There is no escaping the conclusion that a head-and-shoulders pattern has completed on the chart, with the break below the neckline at $884 which occurred last week.
I had questioned gold’s ability to keep rising, given the break of the upward-sloping bull trendline late in March. There was a bounce; however, it failed to close properly clear of the 50-day average, and a sequence of lower highs and lower lows is now in place, characteristic of a downward trend.
The pattern targets a move to $756, but this requires failure of support from the 200-day average, currently near $820 and congestive support, which propped up the market last November at $780.
The move is as much about the market’s perception of the dollar as it is about gold itself. We could see a minor post-neckline break bounce: normal with such patterns. But if the price remains below $898, the bearish outlook remains intact.
The super-long-term bull trendline on the log scale chart, drawn off lows seen between 2002 and 2005, currently sits at $572, coincidentally also a level that gave congestive support and resistance in 2006.
I’m not suggesting we will see a massive sell-off to this level, only that markets do tend to return to their longer-term trends and we are some way from it at present. I would not be surprised to see the metal decline toward $700 in the longer term and meet this rising trendline in the process.
Index link - NASDAQ Composite (IXIC)
The US index has produced a reasonable bounce since late February.
At the time I alluded to the break above the bull channel return line in late 2007 and a corresponding breach of the channel baseline would provide symmetry. This subsequently occurred with a low of 2,169 seen in mid-March.
More recently the bear trendline on the momentum sub-chart has been broken, suggesting a possible change of sentiment, and what appears to be an inverse head-and-shoulders pattern has completed, and if proved true would target a test of 2,592.
However, at present and despite declining volume levels, the index is at key levels, having moved up to test the bear trendline drawn off the peaks seen during last autumn and winter, and which resists at 2,434.
If the index can climb above this area then a test of the 200-day average now close to 2,525 could see the pattern target achieved. However, head-and-shoulders patterns can sometimes prove to be continuation formations. If this is so then now could be a good time to jump ship. Any further breach of the channel support line, currently at 2,285 would be decidedly worrying for bulls.
Technical talking point - Measuring the market’s tone
Mostly, when we look at the technicals of a potential investment, we must focus on price action over time or perhaps an indicator derived from price. If it is available, the behaviour of corresponding volume can also shed some light on what’s going on, and you might well ask: what else is there?
Well for an individual stock there isn’t anything. However, when it comes to assessing markets then there are some more possibilities. We can derive a set of other measures that are potentially useful in discerning the state of the market as a whole and it goes without saying that it makes perfect sense to keep in mind the general market backdrop when considering an individual investment opportunity, as even the best-looking chart can be impacted by a market that does not want to cooperate.
These extra measures come from macro parameters such as the number of shares making new highs or lows and the number of advancing shares against the number of shares declining. Such analysis used to require the manual collecting of data and was limited to what was published. But with programs such as Sharescope, with their abilities to produce the data on the fly, it is now possible to apply such studies to a broad range on market indices.
One of the more popular studies divides the advances by the declines and keeps a running total to produce a market breadth indicator. It often seems to provide a good indication of the general mood of the market and, while its actual value is unimportant, by using trendlines or moving average triggers and looking for divergence in the line from the index, it can provide an early warning to a change of trend.
The example shows the FTSE 100 index, and on inspection the value of the cumulative advance/decline line should be self-evident.