PM Equity Index Forms a Triple Top, What's Next?
Source: Chris Vermeulen, TheGoldAndOilGuy (9/9/10)
"We are three–eight days away from a pop and drop in the gold price."
Following are my explanation and charts of what I think is unfolding.
HUI—Gold Bugs Index
This chart tracks a basket of gold companies and can be used as a leading indicator for gold bullion at times. This index tends to lead the price of gold before rallies and also during declines. I have seen this lead by a few hours and even up to seven days. I find it out perform when gold is about to rally, and underperform when gold is topping or about to start another move down.
It looks as though we are forming a triple top, which also happens to be at a previous 2009 resistance level. Each time this level has been reached, sellers take control and send the market sharply lower. There have been several long upper wicks formed in the past few sessions telling me that buyers are pushing the price up, but then sellers hit the sell button pulling the market right back down. If this triple tops plays out, I expect a multimonth correction to take place.
UUP—U.S. Dollar ETF
The U.S. Dollar looks to have found support at the March/April lows and has put in a very solid rally. If the chart pattern is correct, then it looks as though the dollar will breakout to the upside and run to $24.75 area. The relationship between the dollar and the precious metals sector is generally inverse—meaning if the dollar rallies, both gold and stocks should fall.
GLD—Gold Bullion ETF
The chart of gold has identical patterns no matter if it's this ETF or spot gold price. So this analysis goes for both ETF and gold bullion prices. The past two times gold rallied for this length of time without any sizeable pauses, we saw the price of gold drop $70 per ounce and $140 per ounce, which is equivalent to a $7–$10 drop on this GLD fund—a decent size move.
The chart is screaming of a nasty correction to occur any day now. With gold testing the June highs I feel its only days away. What I am looking for is a pierce of the June high. That will suck in the rest of the bulls as they jump on the bandwagon and cause all the shorts to cover their positions. This causes a pop, and once buying starts to dry up, the big money will start to sell down the price to trigger the stops and start a multiday waterfall selloff.
With the volume declining as the price grinds its way higher, it tells me fewer individuals want to buy in at these high prices. Once the price starts to slide, it will cause the stops to be triggered. And because there have not been any substantial pullbacks along the way, there is a larger number of stops sitting in the market waiting to get hit.
Midweek Precious Metals Trading Report:
In short, I feel precious metals are on the verge of a sharp correction, which may only last a few days, and the drop will be substantial. I still think we could see a few more up days or sideways sessions before this happens, as the June high for gold bullion should be penetrated before the market truly reverses back down.
Those long gold, silver or PM stocks should think about tightening their stops—and for the gold bugs to mentally prepare themselves for a correction.
I hope my biweekly trend reports help shed some light on the market for you. My trading alerts and frequent updates are reserved for subscribers only. If you would like more trading analysis, updates and trades please join me at: www.TheGoldAndOilGuy.com.