Monday, June 6, 2016

Gold's Direction - The State of the Trend vs Wave Countng

If you pay much attention to the wave analysis, Fibonacci, Elliot, what have you, the next significant move in gold is surely down to $1150ish.  You can sample some of what these types are saying now herehere, and here.  I am a kindred spirit with the wave people in that I am mostly a technical analyst. The chicken scratching means all the world to me.  But the fib levels and other cycling methods usually don't interest me much.  But when there seems to be a lot of these practitioners saying the same thing - well, you ignore them at your own peril.

There seems to be a difference of opinion now on gold between trend analysis and the wave counting.
I have found that one of the most consistent means of looking at the health of a trend is simply by moving averages.  Of course you've probably heard of the "golden cross" or "death cross" when there is a crossing of the 50 day moving average with the 200 day, either up or down.  But one good way of seeing if a trend is intact or changing is by looking at what I call MAPS - Moving Average Pair Support.  This is the 140 day ema (exponential moving average) compared with the 200 day ema.  It is the best divider I know of between a bear and a bull market.

Major market averages typically obey the MAPS division pretty well, but gold in particular obeys it very consistently.  Let's look at how gold has behaved in its bull/bear transitions since the late '90s by viewing them with MAPS: (click on images to enlarge)

Here we see that the moving average pair was down-sloping and acting as resistance in the bear market, then a violent breaking out above MAPS followed by a cross between the moving averages.  From then on, MAPS acted very consistently as support in the new bull market.  There was something of a breakdown of this in early 2003 as the MAPS slope switched to negative and gold went well below this negative slope.  But if you will recall, there was a lot of unusual stuff going on in the world at the time.  The US was getting ready to invade Iraq, which we thought was chock full of bio-weapons, and gold went on a tear, bending the moving averages sharply up.  Then the war was quickly won, and gold overshot a bent MAPS to the downside.

The second bear/bull transition was 2009:

The Financial Crisis of 2008 put gold into a one year decline.  This changed with a MAPS cross, after which the MAPS support was consistently obeyed for years.  Which brings us to the present:

MAPS has switched from resistance in the four year bear market, to a cross, and now to support in a new bull.  If past MAPS behavior is any guide, the persistent obedience gold has with it has begun a new chapter and the severe bounce we saw on Friday smack on the MAPS bound will probably wind its way up to new post cross highs. The cycling move to the mid $1100s would be well below MAPS, hence the difference of opinion between the state of the trend and the cycling.

If gold does in fact go to around $1150, the cycles have it there for just a month or less before flying back into the bull climb. So is it worth trying to trade a portfolio around this short term movement?  That depends on your commissions, taxes, your tolerance for aggravation, and whether you own mostly gold or the miners.  If you have a line up of quality miners (not ETFs) they can be more independent of the short term gold price than you may think, being moved by positive company developments while you have them traded to the sidelines timing a gold price blip:

As this chart shows, over the month of May, we saw a $100 move down in gold, but trying to trade a gold miner portfolio around this would have been very dicey.  So if we go another $50 down to the $1150 level, will that trading turn out any better?  Maybe, who knows.  The miners, especially South Africans, led the turn at the start of the year, and they seem to be strongly leading now.  It may be advisable to just watch gold's behavior on this bounce off  MAPS, and if it clearly weakens below it, maybe take some profits here and there.

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