Gold's Pullback An Opportunity?

By: Chris Ciovacco | Fri, Feb 17, 2012
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We mentioned Wednesday that we were interested in the charts of gold and gold mining stocks. Gold mining stocks responded today with sharp gains. Given that more money printing is on the way (much more), we added gold and gold mining stocks to our allocation today. Gold has been correcting for two weeks allowing for an improved risk/reward entry. Gold remains $195 below its peak made last year, and $37 below its recent early February peak.

There are numerous takeaways from the chart of gold below:

  1. There are three steps required for a basic change in trend. Step one is a break of an established trendline. Gold had been in an established downtrend for four months as shown via the blue trendline. Step one, a trend break, was completed in January (see orange arrow).
  2. Step two is to make a higher low, which may be happening now near the pink arrow. Notice how gold held at the up-trending pink dotted line, which may be acting as support. Gold also bounced Thursday at the thin black trendline dating back to early 2012 (above pink arrow).
  3. Step three will be completed if gold can exceed the early February high of 1,766 (near green arrow). With the ECB due to print even more money at the end of February via the second round of unlimited three-year loans to insolvent banks (see video), there is a sound fundamental case for gold.
  4. Today's candlestick is known as a "hammer", which often occurs near a point of reversal.
  5. The 200-day moving average, which was recaptured in mid-January, continues to have a positive slope, which is indicative of a rising trend.
  6. A retest of the 200-day is possible, meaning more downside is possible in gold.

$GOLD (Gold - Spot Price (EOD)) CME

What is the biggest short-term risk for gold? If the market feels an "all clear" has been given in Europe, gold may drop further based on the perceived reduced need for safety. Regardless of what the market feels, the odds are remote any perception of "all clear" will prove to be lasting relative to Europe's unsustainable debt levels (see December video).

In the chart below, the three steps for a trend change appear to be in place for gold mining stocks (GDX): (1) a break of the orange downtrend line, (2) a higher low, and (3) a higher high.

GDX (Market Vectors Gold Miners) NYSE

If GDX can continue higher, it does have to contend with a downward sloping 200-day moving average, but that is still 3.6% above Thursday's close. If GDX can move back to the top of the pink channel, it would represent a move of 7.4%. The green arrows above show a series of higher lows which mark the uptrend off the late 2011 low.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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