The last time I wrote about my technical concerns with gold, the main feedback I got was, “You’re wrong! This time it really is different.”
Everyone seems to think that gold is on a one-way moonshot ride to somewhere in the $3,000 to $10,000 per ounce range.
That’s a very dangerous idea … and not because I don’t agree with it.
One of my favorite investment books is “Being Right or Making Money” by Ned Davis. (A third edition of this book was recently published in October 2014.) We can be right about our ultimate destination … and still lose plenty of money along the way.
If you’re a raging bull on gold, please take today’s observations as an opportunity to manage your expectations about what gold might do in the short-term. If you’re a speculator looking for a compelling short-term profit opportunity, I think that gold is setting up for a short-term correction.
First, a quick update on the SSI chart for gold (via GLD, the gold ETF):
Needless to say, gold has had an amazing 2016. The SSI Trend is as strong as it has ever been. Gold hasn’t even corrected into the Low Risk Zone and it sits near a three year high.
The current VQ on GLD is 12.9%. From the recent high of $130.52 that puts the top of the Low Risk Zone at $120.41 and the SSI Stop Loss at $113.68. I am not expecting to see GLD hit its stop loss but I do believe that we could see gold fall 8% to 10% in short order. Keep in mind that this would just be the normal course of business for a gold rally.
The reasons for my skepticism about the ability of this gold rally to continue on without a breather should be familiar to you by now.
There is big overhead resistance around $130 on GLD per the volume-at-price (VAP) chart we’ve been following all year.
The futures markets are showing historic levels of sentiment extremes, as I pointed out a few weeks ago.
And my latest time-cycles analysis shows a pending short-term top for cash gold prices.
On the bullish side of the ledger, gold does tend to be seasonally strong through late September / early October. It could well be that the seasonal winds keep gold from a substantial correction for the next 4 to 6 weeks. If we don’t get the expected correction in the next few weeks then I would definitely expect it in October or November.
Gold is doing great and I expect more greatness in the months and years to come. It won’t likely, however, be a straight moonshot to the top … and it’s important that we continue to monitor the situation and monitor our expectations.
To being right AND making money,
Richard M. Smith, PhD
CEO & Founder, TradeStops