Getting Technical
WEDNESDAY, JUNE 26, 2013
Charts Suggest Gold Will Bounce
By MICHAEL KAHN
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With Fed taper talk roiling the markets, stocks continued their dead-cat bounce but gold broke down yet again. Don't get enamored with either trend.
Stocks continued to rebound off the recent drubbing triggered by the Federal Reserve's hints that it may cut back its bond-buying program. Meanwhile, gold can't seem to get out of its own way.
But this week's stock-market strength and this year's gold weakness are both running into problems. Let's start with stocks.
There is no denying that the Standard & Poor's 500 snapped its rising trend from last November's important low (see Chart 1). With last week's losses, the index set in place a series of lower highs and lower lows to define a short-term bearish trend.
![[image]](http://barrons.wsj.net/public/resources/images/ON-BB347_GT1062_NS_20130626151324.jpg)
The question now is whether this is a corrective pause or the start of something worse. I have presented evidence here over the past few weeks that supports the latter case. However, even as stocks are still set up for lower prices, basic technical analysis only looks for another few percentage points to the downside.
If and when the current bounce ends, a downside target of 1,520-1,535 is reasonable, bringing the total correction from May to roughly 10%. The index traded at 1,600 Wednesday afternoon.
Why that level? That is the level at which the index bounced off its trendline in April. It is also where the rising trendline from October 2011 will be in a few weeks. And the 200-day moving average is also rising at a pace to reach that zone at the same time. The combination of support features is indeed compelling.
On the bullish side, there is always a chance that the market made its low this past Monday. However, we need proof in the form of technical breakouts above several features, including the 50-day moving average, currently at 1,619. Better yet, a move above the June 16 high of 1,654 would convince the most stubborn bears to change sides. That is a long way to go from today's trading, however, so it is not a practical yardstick for active traders.
Gold, on the other hand, is a total mess. The brutal bear market from 2011 offered many false hopes, some of which did get the better of me. It actually accelerated to the downside with the April 2013 debacle, and last week I wrote that sentiment was so bearish that it could be a contrarian signal that the worst was over (see Getting Technical, "No Relief in Sight," June 20).
It wasn't.
But even with Wednesday's latest decline, sentiment remains at extreme bearish levels, according to the Daily Sentiment Index survey of traders compiled by veteran trader Jake Bernstein at trade-futures.com.
And now the SPDR Gold Trust (ticker: GLD) is closing in on the downside target I mentioned in last week's column at 118 (it traded at 119 Wednesday afternoon). This target was based on the height of the April-June triangle pattern projected down from last week's breakdown point.
Making this an even more compelling target is that it is also the target for the break of the much larger triangle pattern formed between July 2011 and April 2013 (see Chart 2).
![[image]](http://barrons.wsj.net/public/resources/images/ON-BB348_GT2062_NS_20130626151346.jpg)
Because the percentage changes involved in long-term patterns can be large, I used a chart with log scaling, which is similar to percentage-change scaling. The height of the pattern projected down from the breakdown point in percentage terms is also in the 118 area.
Gold is in a serious bear market, but all bear markets do eventually come to an end. Still, catching falling knives is a dangerous game to play. As stocks may have seen a dead-cat bounce after falling so sharply, gold may experience a dead-elephant bounce since it has fallen so brutally this year.
But if ever there were a time that price action, momentum, cycles and sentiment are coming together, it is now for gold. Picking up a coin or two with a long-term time horizon may be a good idea.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
There is no denying that the Standard & Poor's 500 snapped its rising trend from last November's important low (see Chart 1). With last week's losses, the index set in place a series of lower highs and lower lows to define a short-term bearish trend.
Chart 1
Standard & Poor's 500 If and when the current bounce ends, a downside target of 1,520-1,535 is reasonable, bringing the total correction from May to roughly 10%. The index traded at 1,600 Wednesday afternoon.
Why that level? That is the level at which the index bounced off its trendline in April. It is also where the rising trendline from October 2011 will be in a few weeks. And the 200-day moving average is also rising at a pace to reach that zone at the same time. The combination of support features is indeed compelling.
On the bullish side, there is always a chance that the market made its low this past Monday. However, we need proof in the form of technical breakouts above several features, including the 50-day moving average, currently at 1,619. Better yet, a move above the June 16 high of 1,654 would convince the most stubborn bears to change sides. That is a long way to go from today's trading, however, so it is not a practical yardstick for active traders.
Gold, on the other hand, is a total mess. The brutal bear market from 2011 offered many false hopes, some of which did get the better of me. It actually accelerated to the downside with the April 2013 debacle, and last week I wrote that sentiment was so bearish that it could be a contrarian signal that the worst was over (see Getting Technical, "No Relief in Sight," June 20).
It wasn't.
But even with Wednesday's latest decline, sentiment remains at extreme bearish levels, according to the Daily Sentiment Index survey of traders compiled by veteran trader Jake Bernstein at trade-futures.com.
And now the SPDR Gold Trust (ticker: GLD) is closing in on the downside target I mentioned in last week's column at 118 (it traded at 119 Wednesday afternoon). This target was based on the height of the April-June triangle pattern projected down from last week's breakdown point.
Making this an even more compelling target is that it is also the target for the break of the much larger triangle pattern formed between July 2011 and April 2013 (see Chart 2).
Chart 2
SPDR Gold Trust Gold is in a serious bear market, but all bear markets do eventually come to an end. Still, catching falling knives is a dangerous game to play. As stocks may have seen a dead-cat bounce after falling so sharply, gold may experience a dead-elephant bounce since it has fallen so brutally this year.
But if ever there were a time that price action, momentum, cycles and sentiment are coming together, it is now for gold. Picking up a coin or two with a long-term time horizon may be a good idea.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
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