Is This the True Breakout, or Are We In for a Correction?

By: Przemyslaw Radomski, CFA | Tue, Jul 26, 2011
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Based on the July 22nd, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

Recently, there has been much distrust of the political process in the U.S. where politicians are Dancing on the (debt) Ceiling, as the Lionel Ritchie song goes. Negotiations to raise the U.S. borrowing limit have continued to show little signs of progress, even as ratings agencies warn that a delay in payments to creditors would jeopardize the country's sterling credit rating. The Treasury Department has said that Congress must raise the U.S. debt limit before Aug. 2 to meet all of its obligations to creditors. There is also some conjecture about a third round of quantitative easing in the U.S. if economic conditions remain weak, although Federal Reserve Chairman Ben Bernanke commented last week that policy-makers are not ready to act at this time. President Obama's 50th birthday is coming up and if you're wondering what to get him, he could use about $14 trillion.

And then there is the euro zone watch. Investor concerns didn't disappear following the previous Friday's announcement of the results of stress tests on European banks. Most banks passed the tests, which were designed to gauge bank performance should European economic conditions worsen. But market watchers said they may not have been strenuous enough to be an accurate gauge of the perilous state of European financial markets. Last week the European leaders agreed to reduce Greece's debt burden in a last-ditch effort to preserve the euro and stem a broader financial panic. The pact is part of a rescue package of 109 billion euros, or $157 billion, for Greece, the most troubled economy in the euro zone. It will force many investors in Greek debt to accept some losses on their bonds. (No big surprise there.) The deal would also provide substantial debt relief for Ireland and Portugal. And by giving the main European rescue fund increased powers to assist countries that have not been bailed out -- like Spain and Italy -- leaders are betting that the program, described by some as a new Marshall Plan for Europe, will serve as a firewall against the contagion that has threatened to engulf some of the region's largest economies.

The tense situation on both sides of the Atlantic Ocean explains why the amount of gold held by exchange-traded funds, popular tools for investors to gain exposure to gold, reached a record high on July 22nd (previous Friday) at 2156.4 metric tons, according to Barclays Capital.

We expect that Republicans and Democrats eventually will strike some kind of debt-ceiling agreement to avoid default, although it probably will not happen until the last moment due to the political posturing. When that happens, there might be an additional correction in gold.

Nothing goes up in a straight line. After such stunning gains over the last few weeks the situation has become tense for gold. Any pull back could be a great buying opportunity for us. All we have to do is make sure we have freed-up capital to buy precious metals when they correct. This makes this analysis all the more meaningful.

We aim to be well prepared when a correction comes, so let's begin the technical part of this essay with the analysis of the yellow metal itself. We will start with the very-long-term chart for gold (charts courtesy by http://stockcharts.com.)

$GOLD Index

We see some important developments. On Monday, gold moved above the resistance level, and hit $1,613.5. The main question now is whether this confirms the breakout. In our last free essay we stated that the gold breakout was yet to be seen:

No breakout has yet been seen and our previous comments remain up-to-date. The situation continues to be quite similar to what we saw late last year (triple top) and it is clear that the consolidation at that time was quickly followed by a decline.

Even though gold moved up by 0.7% on Monday and finished above $1,610, we still believe this comment is up-to-date this move has not been confirmed - neither by volume, nor by gold from the non-usd perspective.

GLD ETF Chart

The situation remains somewhat unclear on the long-term GLD ETF chart with two possibilities on the table. GLD may either decline to the 50-day moving average (marked on the chart with "Are we here") or decline insignificantly and rally afterwards (marked with "or here?"). Either way, at least a short-term correction still appears likely but what we have seen to this point is not enough to allow for a valid comparison to any particular point in the past and thus the correction does not appear to be over. It is simply a tough call at this time to identify which previous pattern is most likely to be repeated. The jury remains out.

As we've mentioned earlier in this essay, there was no breakout in gold from the non-USD perspective (the chart doesn't show the last few days, but there was no breakout in this time frame either) and gold stocks actually declined on Monday even though gold moved higher.

$GOLD:UDN Chart

In fact, we have seen a pause as the recent rally reached the resistance level created by previous tops. We have not seen a breakout and the recent volume levels have been somewhat bearish. Recently, we have seen gold rally on low volume levels and decline on greater volume. This is a bearish development and when considered along with the pending resistance line, another rally from here is not a very likely scenario.

Finally, let's have a look at mining stocks. This week, we're going to check take a look at this sector through the Gold Miners' Bullish Percent Index.

$BPGDM Chart

In the above chart we see the overbought (a.k.a. top is near) signals. The RSI and the Williams %R continue to warn that the top is near. At least a short-term correction is likely based on this information.

As a reminder, the above index is a market breadth/momentum indicator that is calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart, which emphasizes strong moves while ignoring small ones) and the amount of all gold stocks in the sector. After analyzing this index thoroughly we found that one of the best ways to approach it is to use RSI and Williams %R indicators - when both are overbought then a local top is likely to be seen soon - which is the situation today.

Summing up, the situation in the precious metals market is extremely tense with gold moving above its resistance level. However, as this movement is accompanied by bearish signs, it seems that the true breakout has not yet been confirmed. The situation in the mining stocks sector remains in tune, with a possibility of a top in the nearest future.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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