From Justin Dove, Editor, The Crux:
The headlines can make your head spin…
One analyst may lay out an open and shut case for why gold is headed for $10,000 an ounce… another could show you a handful of charts that conclude “without a doubt” the U.S. dollar is surely going up – and therefore gold is likely headed down.
Heck… both could be right if they’re talking about different lengths of time.
But in the end, it’s all just a bunch of words. Today, we’re going to look at the markets in a simplistic way. A way that tunes out all the noise coming from jabber-jaws in the financial media.
We’ll look at why, right now, gold and gold stocks are in a “holding pattern”… and likely to continue moving sideways for the next few weeks. We’ll also go over a simple signal that will tell us when it’s time to go “all-in” on gold and gold stocks.
Let’s get started…
It’s helpful to think of the market as a tug-of-war between buyers and sellers:
- As more and more buyers step in to buy an asset, the demand goes up – which means the price goes up. In other words, the buyers are in control of the price.
- Then, as selling ramps up, demand goes down along with the price. In other words the sellers are in control of the price.
So you can think of it simply as either the buyers are winning (demand/prices increasing) or the sellers are winning (demand/prices decreasing).
And you can always see “who’s winning” at any given time with a quick look at a simple price chart…
If the buyers are winning, the chart will be in an “uptrend,” or simply a series of higher highs, and higher lows. You can see this in the chart of gold from 2001-2009. Every time the price started to go down, buyers stepped in and increased demand — sending prices higher and higher.
If the sellers are winning, the chart will show a simple “downtrend,” or a series of lower highs and lower lows. You can see this in a chart of USA Today publisher Gannett from 2005-2008… Every time it seemed like prices were going higher, sellers would take over — pushing prices lower and lower.
As you can see in these examples assets will typically continue moving in the direction of the trend. That is, until the trend changes…
The points where trends change are called “breakouts.”
Here’s an excerpt from our educational interview on “common sense” technical analysis that explains this concept well…
A breakout occurs when the price of an asset reaches either a new high point or a new low point for a given time period. An “upside breakout” is when the asset hits a new high. A “downside breakout” is when an asset hits a new low.
Breakouts can be either short-term (about five or 10 days) intermediate-term (like more than 30 days) or long-term (more than 200 days).
Breakouts serve as a starter’s pistol to signal the beginning of a trend. No uptrend can start without an upside breakout… And no downtrend can start without a downside breakout. Let’s look at a few examples…
After suffering the big decline of the late 2008 credit crisis, crude oil traded sideways for months before staging an upside breakout around $48 per barrel in mid-March (A). It then proceeded to drift sideways in the high $40s before staging another upside breakout around $55 per barrel in early May (B).
As you can see, the concept of an “upside breakout” is simple. It’s when the price of an asset moves into a new area of higher prices. In oil’s case, that move in early March took crude to its highest closing price of the past 60 days. Traders call that a “60-day upside breakout.”
Now let’s look at a downside breakout.
The chart below displays the downside breakout in shares of Potash during the summer of 2008…
After peaking at $77 in mid-June (A), Potash drifted lower into the $70-per-share range. It then staged a downside breakout in August (B)… taking shares all the way down to $51.
This was the lowest closing price in 90 days for Potash… So you can understand why we call this a “90-day breakout.” Keep in mind… it’s also a 60-day breakout, because if shares are hitting their lowest level in 90 days, they are also at a 60-day low… as well as a 30-day low and a three-day low.
Breakouts are important because they signal possible trend changes. If you are looking to trade an asset in one direction, it helps to wait on a breakout before making your move… It helps to wait for the market to “confirm” your belief.
Waiting for a bit of price confirmation ensures you aren’t fighting the tape… or placing your money into assets that are drifting sideways for long periods of time.
Analysts and talking heads can come up with a million great reasons why an asset’s price may go up or down in the future. But the only thing that really matters is “who’s winning”…
- You WANT to own assets when the buyers are “winning” – and pushing prices higher.
- You DON’T WANT to own assets when the sellers are “winning” – and pushing prices lower.
So, what does all this have to do with gold today…
Let’s apply all this “common sense” technical analysis to the price of gold and gold stocks today.
As you can see in the 15-year chart of gold below, there’s no definitive uptrend or downtrend… in fact, there’s BOTH:
This pattern is known as a “wedge.”
A similar pattern shows up in the three-year chart of gold stocks (as measured by the Gold Bugs Index)…
You can think of a wedge as a sort of “tie” between the buyers and sellers. It happens when neither buyers nor sellers can emerge as the clear winner.
As prices reach the top trend line, buyers are not convicted enough to add to their positions… so confident sellers push the price lower. But as the price gets close to the lower blue line, confident buyers step in and increase demand – pushing the prices higher.
This pattern typically indicates some sort of uncertainty. And that’s exactly what we’re seeing with gold today…
Nobody is quite sure which direction the dollar will go (a higher dollar typically means lower gold prices), or whether or not to believe Donald Trump’s promises on tax and infrastructure plans. Neither the buyers nor sellers are quite confident enough to push prices in a clear direction.
So for now, gold is stuck in a sideways holding pattern… or what could be called “wait and see” mode.
But this choppy up-and-down dance can’t go on forever…
As you can see in both gold and gold stocks, things are coming to a head. As the trajectory of the dollar and political landscape become more clear in the weeks ahead, either the gold stock buyers or gold stock sellers will emerge as the clear winner. And as for gold, this longer-term wedge may play out for a few years yet… perhaps until the next crisis.
We’ll see what’s next manifest in the form of an upside breakout or a downside breakout.
- If gold and gold stock prices breakout of the wedge to the upside it will be a clear buy signal.
- If gold and gold stocks breakout to the downside of the wedge, watch out below. Prices will then be most likely to fall until enough buyers are confident enough to step in and “buy the dip.”
So if you’re invested in gold or gold stocks (or looking for a safe entry point), do yourself a favor and tune out all the talking heads. All we have to do is keep a close eye on these charts over the next few weeks.
When we see prices breakout either up or down, we’ll have a clear indication on which way prices are most likely headed… and can trade accordingly.
Regards,
Justin
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