Some Chart Analysis on Gold

In light of the recent apparent reversal by Fed Chairman Ben Bernanke when it comes to the timeline for any TAPERING of the Fed's Bond Buying program, affectionately known as "QE" for short (I like to think it stands for QUICK and EASY profits for Wall Street), I felt it might be a good idea to take a look at where gold stands on the technical price charts.

Let's start off with the Daily Chart only as I am pressed for time but wanted to get something posted for the readers. Note also I am using an old but very reliable technical indicator known as the Directional Movement Index. I like this index because it is basically a trending indicator. It is thus very useful for determining whether a market is in a TRENDING pattern or whether it is in a sideways or NON-TRENDING pattern.

A quick primer on this indicator is therefore in order before proceeding - it consists of THREE lines; two of them are DIRECTIONAL INDICATORS ( +DMI and -DMI ); the third is the TRENDING INDICATOR ( ADX ).

You can see those noted on the chart. The +DMI or positive directional movement indicator is the blue line; the -DMI or negative directional movement indicator is the red line and the ADX is the dark purple line.

When prices are moving higher, the +DMI will move higher and the -DMI will move lower with the result that +DMI will BE ABOVE -DMI.

When prices are moving lower, the -DMI will move higher while the +DMI will move lower with the result that -DMI will be ABOVE +DMI.

If the blue line is rising therefore and remains above the red line, the price is rising.

If the red line is moving higher and remains above the blue line, the price is falling.

That takes some getting used to among those new to using this indicator but once that is understood, the direction of price is very easily seen by a quick glance at the respective lines.

The third indicator, the ADX (purple line) will rise whenever a market is in a trend and fall when the trend is ending. When the market is moving sideways or is trendless, the ADX will move lower until a new trend emerges (either up or down; it doesn't matter) when the ADX will begin to rise once more.

When a market is in a strong uptrend, you will have the +DMI moving higher with the -DMI moving lower  with the +DMI remaining ABOVE the -DMI. You will also have the ADX rising.

When the market is in a strong downtrend, you will have the -DMI rising with the +DMI falling with the -DMI remaining above the +DMI. You will also have the ADX rising.

That being said, look at the chart and see if you determine whether or not gold is in a trend and if so, what that trend has been, up or down? If you chose DOWN, you win the stuffed animal prize.

Can you see how the red line crossed above the blue line back in November of last year? That was your sell signal in gold. It was also an early warning of the impending break of downside horizontal chart support at the critical $1680 level.

Note at that time the ADX was down below 15 indicating the lack of a trending move as it had already turned lower upon the inability of gold to clear $1760. The downside crossover of the blue line  ( +DMI ) below the red line ( - DMI ) was a warning to bulls to book profits or at least protect profits, not necessarily go short.

From the point of the upside crossing of the red line above the blue line in November, this market was to be traded from the short side notwithstanding all that claptrap about gold backwardation, etc.

Now look at the ADX during the time inside the rectangle. You can see that gold was making up its mind whether to continue moving sideways or break lower. The ADX was not moving higher but was stuck in a sideways to lower pattern between 20 and 15 indicating the lack of trend. Once the price broke down below horizontal chart support at the $1640 level, the ADX began to turn up and cleared the 20 level indicating that a downtrend was forming. Note all the while this is occurring, the red line remains above the blue line. Negative directional movement is dominating the chart. This means one DOES NOT BUY no matter what the various headlines some in the gold community were posting on their websites.

From that point on, the ADX continues rise with a few brief periods of mild dips in it before it goes on to rise to new highs. It is now turning down from a very lofty level up near 45 which indicates there is currently a PAUSE in the downtrend, a downtrend which I might add has been very strong and very long in the tooth.

However, while the red line is moving lower and the blue line is moving higher, the fact remains that the two directional lines have NOT CROSSED. What this means is that from a pure chart perspective, the current move higher in gold is nothing more than a rally in an ongoing bear market.

For this market to change complexion, I will need to see an UPSIDE CROSSOVER of the +DMI or blue line ABOVE the -DMI or red line. Keep in mind that because the downtrend in gold has been of such great extent and duration, the ADX will continue to move lower for a while even if price continues to ascend further. A way of interpreting this in English is to say that it will take quite a move higher in the price of gold to REVERSE the downtrend AND SIGNAL the start of a NEW UPTREND.

Remember, a market can end a trend without necessarily beginning a new trend in the opposite direction right away. By the way, have you noticed that DESCENDING 50 DAY MOVING AVERAGE? It is still some $80 or so ABOVE the current price so until or unless that average is cleared, bottom calling is ill-advised. Only short term, TRADEABLE BOTTOMS, are justified but those mean exactly what I stated, "SHORT TERM". I am attempting to illustrate here what the inputs are that are required before I personally will feel comfortable saying we have a MORE LASTING BOTTOM in gold. Perhaps we already do - then again, perhaps we do not. At this point this chart does not confirm a lasting bottom only a pause in an ongoing downtrend in the metal.

Lastly, the variables that one chooses to set up the indicator determine how quickly it will turn and give off trading signals. When it comes to gold, I prefer to use a bit longer than normal timing factor so as to weed out some noise and prevent false signals. This is however the daily chart. This same indicator can be used on all time frames down to 5 minutes if you want although I think the usefulness is pretty much over once you move down any shorter than a two hour chart to be honest.

I wish you readers to know that the reason I am writing this article is to help you to learn to think and trade or invest for yourselves and not be moved by every headline or the latest gold community buzz word or theory. Most of the people who write those websites ( not all of them)  make their livings by selling ads on them based on the number of hits. They have a vested interest therefore in generating as much website traffic as possible as it increases their monthly checks. Those of us who actually make our living IN THE MARKET, have no such luxury but must be prudent. One can find experienced traders and one can find reckless traders but one will search in vain for EXPERIENCED AND RECKLESS traders. There are no such creatures as any of the reckless ones have long ago become road pizzas on the trading floor of the exchanges having failed to survive as Traders long enough to actually have gained enough experience to know what the hell they are prattling about.

One more reminder, this is not a Holy Grail of an indicator. It is just one of many that I use in my tool box. Some are more responsive; others less so. But what I try to do is to use is several trusted indicators to develop a consensus and then tie those in to various support and resistance levels including Fibonacci retracement levels to determine how to approach a particular market. Along those lines you might want to check in with my friend, Trader Garrett, whose website is listed in the favorites section over on the right hand side of this blog. He is also a veteran trader and both of us share the same philosophy when it comes to putting our hard-earned capital at risk in a market. Neither of us are given to sensationalism. Hard nosed realism is the key to survival if you are going to trade in these markets.

Keep in mind an old axiom of mine that sums up how I feel about the need for humility. Opinions are like armpits. Everyone has two of them and they all stink. The only opinion that ultimately matters is price action and whether or not you are on the right side or the wrong side.

Trader Dan Interviewed at KWN Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly interview with Eric King over at King World News Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/13_KWN_Weekly_Metals_Wrap.html

Unleaded Gasoline on the Move

I have been watching developments in the crude oil and unleaded gasoline markets with a great deal of interest. This week's numbers from the EIA and other private sources shocked the market due to the extent of the drop in crude at Cushing and sent both markets on a tear higher. Crude is now trading close to $106/bbl  as I write this and unleaded gasoline has pushed above the $3.10 mark (remember - that is a wholesale price not the pump price).

Frankly I do not see the US economy as strong enough to support either crude or unleaded gasoline at current prices but right now hedge funds are driving these markets higher and the momentum is strong to the upside. There certainly is no shortage of WTI from what I can see but a goodly portion of it appears to be leaving the US via exports to the EU and elsewhere.

One has to wonder however at one point the spike in gasoline prices at the pump is going to hit Mr. and Mrs. Consumer right between the eyes. You can make a case for rising energy prices being inflationary but you can also make a case for them being deflationary.

In the former case, energy costs are a major input in manufacturing of all kinds not to mention shipping/transportation costs of goods that need to move to market. Think also airlines, railroads, etc. Unless companies are willing to eat the higher costs, they have to raise prices to shore up profit margins.

In the latter case, consumers are not exactly awash with surplus income right now thanks mainly to the moribund labor markets and flat wages. If a larger chunk of their disposable income goes toward transportation expenses ( it is also summer vacation time), that results in them having less to spend at the local Wal-Mart.

I do think that if crude somehow manages to push past $110 (basis WTI) and especially if it climbs through $115, we are going to see some market impacts elsewhere. Let's keep a close eye on this.

By the way, those of you working the grains markets might have noticed the sharp selloff in the beans today. Yesterday's forecast changed and that, in combination with the bearish USDA reports yesterday, finally caught up with the corn and the beans. That might be the silver lining for consumers to help enable them to cope better with rising gasoline prices. If food prices begin to drop, it will take some of the pressure off their checkbooks.

Lots of variables to consider - one thing however is extremely important - gold, and especially silver, need an inflationary psyche to thrive. Right now we have energy up and food moving down. One is tending to cancel the other out. What we have to watch is to see whether or not the two groups will move in sync at some point.

Physical market tightness helps keep a floor of support under gold but it takes a genuine shift in sentiment towards one of inflation to make the yellow metal run. Until the gold shares can put in a better performance than they heretofore have managed to accomplish, I look for rallies in gold to be sold. Bulls are going to have to PROVE that they are determined to drive prices higher before the strong-handed shorts are going to panic.

Rick Santelli echoing my Sentiments

If you would like to watch Rick Santelli at his best, check out this segment of his show on CNBC where he describes exactly how he feels about this idiocy with the "Taper Caper".

I can tell you as a long time professional trader, that he is exactly dead on target. Once upon a time, those of us who make our living in the market and not off the market, attempted to master the fundamentals of those markets in which we traded. We prided ourselves on our understanding of the factors determining supply and demand, seasonal trends and tendencies, value pricing, etc. I can say that more often than not, it seems as if none of that matters at all. All that does matter is whether or not Uncle Ben will keep the money spigots wide open or close them off.

Trading used to be a business which required hard work, long hours of meticulous research and devotion to ones craft if one was to be successful. Not any more! Now all that is required is ferreting out the inner workings of Mr. Bernanke's mind and determining whether or not he is in a generous mood when it comes to supplying punch to the multitude of bowls laid out in front of him on Wall Street.

I can only say that if this is what the greatest nation on the face of the earth's financial market system has been reduced to, kiss us goodbye, because we are going the way of ancient Rome faster than I had even contemplated.

Enjoy Rick's rant! It is a classic....

http://video.cnbc.com/gallery/?video=3000182232&play=1

HUI Chart Improving but more Work Needed

The rally in gold is finally pulling the lackluster mining shares higher and while it has somewhat improved the technical chart posture of the complex as a whole, work remains to be done to cement a bottom or at the very least, spook some of the bears who have been extremely complacent.

I have noted a significant chart gap that the index has of yet been unable to close. For this chart to turn friendlier, bulls must at least push into the gap, preferably closing it completely and holding the index through it. Should that occur, we will begin to see some more sizeable short covering in the complex.

The key question potential buyers of the miners are asking is whether or not the rally in the metal will continue or stall out below $1300. There is a line of thinking that the sell off in the Dollar is only due to money flows reversing as many traders were completely caught off guard by Mr. Bernanke's almost bizarre reversal on the duration of the QE program yesterday afternoon in his comments. (Count yours truly in that crowd).

That being said, many look for interest rates to rise FIRST in the US before elsewhere around the globe meaning that the sell off in the Dollar, though quite deep, may only be temporary before buyers return and begin bidding it up again. Upcoming economic data will be critical in this regards.

So far the Euro remains well bid against the greenback but most would agree that the state of the overall European economy is decidedly weaker than that of the US (which isn't saying much now is it?). If the Euro were to clear 1.34, we would have to re-evaluate that but as of now, it has already retreated one full point off its best level against the Dollar. Let's see how it closes the week out tomorrow and whether or not the trade reversals are pretty much done by now or will continue some into the close of trading Friday. If the Dollar begins to start working higher again, gold could come under some selling pressure.

"TO QE or not to QE, that is the Question"

And the answer is....

Even though I have become accustomed to this madness since the Fed first started its QE programs back in late 2008, I still marvel in wonder at the reaction of the investment/trading world to the words that proceed out of the mouth of a mere mortal, who puts his underwear and socks on just like the rest of us lesser beings.

The initial reaction of gold to the much anticipated FOMC minutes today was one of apparent confusion. It first spiked higher only to then fade and lose most of its gains after the minutes hit the wire. Trading seemed to reflect the confusion arising from what I can only term, "convoluted" remarks from the FOMC. On the one hand there were comments about tapering the program by the end of this year; on the other were the usual remarks about the dependency on economic data releases. Basically what the market got was a big, large batch of NOTHING. No one was the least bit clearer or the least bit more insightful into when the Fed would or would not begin to taper. The erratic trading was proof of that to me.

Wait a little while and PRESTO; out popped Uncle Ben and his Magic Money Machine and that was all she wrote: all hell broke loose in the currency markets, the bond markets and of course, the gold market.

What Bernanke did was to give probably one of the most dovish statements coming out of his mouth in some time. And what did the demi-god of finance declare to the mortals? "highly accommodative monetary policy will be needed for the foreseeable future".

And with that, gold was off to the races. As I stated in several private emails - all this chatter about backwardation and Gofo or Tofu or whatever didn't amount to a hill of beans. What mattered and more importantly, WHAT MOVED THE GOLD MARKET, were the words that came out of the Chairman's mouth. That is what scared the hell out of the Bears who had managed to successfully beat back the initial challenge to Resistance near the $1265 level when the FOMC minutes were released.

They were however, no match for the delicious probability of more funny money for the FORESEEABLE FUTURE.

My guess is that what has happened in  the halls of the Fed was that the spike in interest rates on out along the long end of the yield curve had them terrified. Just today there was a story on CNBC about the impact of rising mortgage rates making it more difficult for prospective home buyers to qualify for properties that just a couple of months ago would not have been a problem.

What to do? Why send out Ben and sound like a DOVE and take care of those pesky bond vigilantes who had the audacity to actually attempt to run the bond market at cross purposes to their lawful masters.

Quite frankly I am unsure what to make of the bond market at this juncture. The long bond would have to clear 137 to convince me that the rise in interest rates has been anything other than temporarily halted. They are still a good way from that level last trading near 134`15 as I type this.

Back to gold - from a technical perspective, it finally cleared overhead resistance on the chart (see above) as the move occurred in relatively thin trading conditions allowing the market to experience only light selling pressure as stops were run. You can see that there are now two levels of chart resistance that need to fall for the metal to get a little more upside excitement. The first is near $1290 which is basically what has stopped this evening's progress. The second is psychological round number resistance at $1300. The latter will be a BIGGIE. If it goes, you will see some more sharp short covering and a good shot at $1350 and a solid end to the short term downtrend.

I want to see those recalcitrant mining shares have a good day tomorrow to give the bullish cause more conviction. It is difficult for me to envision them not doing so, as the US Dollar is now imploding on the Forex markets. The Euro is up over 2% as is the Swiss Franc. Even the sickly British Pound is up 1.5% and the Yen, why everyone is suddenly back in love with it. All this because of some words... amazing, absolutely amazing!

Equities of course are loving it - we will probably see the S&P take out its all time high as the party is back on with tapering fears no where to be found, at least for today.

More monetary crack cocaine for the markets - it was either that or watch the borrowing costs of the US government soar higher in the face of an already insurmountable national debt as lenders demanded higher interest rates to accept its IOU's.

Gold pops higher in Asia

Gold jumped in overnight trading during the early Asian session when China released its version of the CPI. June CPI came in at +2.7% on the year where the market was looking for +2.5%. Apparently there was a rush to grab gold when the data hit the wire. Prior to that gold was relatively quiet with a slight bias to the upside.

As you can see on the chart, volume is miniscule however. The big test will be what the metal does when it enters European trading but more importantly, New York trading.

The weakness in the gold shares today (Monday) is generally a bearish sign when the metal and the shares go their own separate way so call me a skeptic until proven otherwise. Asia still loves gold while the West seems to despise it; until the West comes around to falling back in love with the metal, it will be up to Asian buying to do the heavy lifting in the metal.

I have noted an overhead chart resistance zone which basically extends from last week's high at $1267 - $1269. Bears will be complacent unless this region is taken out with strong volume, otherwise they are going to look to sell into this rally. If the mining shares were strong, that would make them second guess so we will have to see how that sector trades during Tuesday's session.

I have also noted a region between $1210 and $1185 on the downside which was the price range delineated by very strong volume. Most of that volume was short covering after the $200 plunge where bears rang the cash register on what was one of the most profitable gold trades in a very long time. There was some bottom picking as well but compared to the extent of the short covering, it was insignificant.

The key for the market right now is that it did drop back down into the very top of that region but attracted more buying that selling. That is a positive. We have moved up some $40 since that brief foray into the HIGH VOLUME REGION. The trend is down however so we can expect the rally to be sold but if the bulls can surprise and take price through the anticipated selling that is going to surface, bears will run and this market could lift towards $1285 - $1290.

It does appear that once again we have that gold backwardation talk emerging. Keep in mind that all those proponents of that theory cost their devotees a tremendous amount of money the last time they were proclaiming a bottom based on that occurrence.

I maintain that until the gold futures market shows a true backwardation structure on the board, all this is just talk that is interesting but as far as a trader goes, meaningless. Price action is what confirms theories. If it does, fine. If it does not, that is also fine. Watch for resistance levels and support levels and make your trading decisions on that and that alone.

Remember what I have written here more times than I care to recall at this point - calling market bottoms and tops is a fool's errand for those with egos that need to be fed. A profitable and successful trader can make a fine living just catching 60- 70% of a trending move.

What will eventually take gold higher will be that shift in sentiment from one of deflation or benign inflation to one of concerns about a resurgence in inflation. That is what we are watching for signs of. When it does, we will know it from the price action!

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King over at the KWN Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/7/6_KWN_Weekly_Metals_Wrap.html