Some nice thoughts from Decision Point using a technical perspective:
For most of this year gold has been navigating a symmetrical triangle, mostly above 900. Recently it broke out of that triangle and is challenging the resistance at the all-time closing high of 1005.5. For any breakout above that level to be “decisive” — not likely to fail — gold would have to reach at least 1036. We are on a buy signal for gold, and the chart is bullish, so we should assume that the outcome will be bullish; however, note that the resistance in this area has been quite stubborn for almost two years.
Gold and the dollar have an inverse relationship, but more recently gold has not been as strong as the dollar has been weak. I interpret this to be a result of the heavy buying of gold that took place as stocks were crashing in 2008 and 2009.
A final observation, many analysts have characterized the large “V” formation that began in early 2008 and runs through the present as a reverse head and shoulders pattern. I respectfully disagree because I believe reverse head and shoulders patterns belong at bottoms, while head and shoulders patterns belong at tops. That said, I am going to use head and shoulders theory to conjure an upside target in the case of a breakout. Measuring from the bottom of the “V” to the resistance at 1005, would give me an upside target of about 1300. Pretty lame, but it’s the best tool I have for now.
Last week I had expected that the S&P 500 would experience another down leg in a correction. Instead, we got a new rally closing high on Thursday. Market internals have not changed significantly since last week, except that short-term indicators are more overbought, so I’m going to continue to look for a correction. This is all rather academic, since we are on a medium-term buy signal.
Bottom Line: Gold closed right on the line of overhead resistance. If it can continue with a decisive breakout, I have an upside target of 1300.
The stock market is overbought, but it has not given us a reason to move out of stocks. Overbought conditions make it a bad time to open new longs because of the possibility of a price correction to clear the condition.
Source: Decision Point
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.