Gold and Overall Market Strength
Source: Chris Vermeulen, TheGoldAndOilGuy (12/12/10)
"Gold is in a strong uptrend still; shorting is not the best play. . ."
Gold 4-Hour Chart
As you can see from the chart below, gold has formed a possible double top. The fact that it made a higher high is actually a bearish sign for the intermediate term 1–3 weeks. When we see a higher high getting sold into with big volume, it typically means the big money is unloading large positions into the surge of breakout traders and short covering that occurs when a new high is reached. Following the big money is very important as it can warn us of possible trend changes before it occurs.
The current selling volume is not exactly a healthy sign if you are looking for higher prices in the near term. If this pattern breaks down, I would expect $1,340 to be reached very quickly.
Keep in mind gold is in a strong uptrend still. Shorting is not the best play, in my opinion. I prefer to see pullback, which washes the market of weak positions, and then jump on the long side for another bounce/rally.
SP500 Market Internal Strength—10-Min., 3-Days Chart
I watch these charts to get a feel for the overall market strength on a short-term basis. The top chart shows the SPY ETF breaking above a resistance trendline on Friday afternoon. This occurred on light volume meaning it is mostly likely a false breakout, and Monday we could see a gap lower at the open or a pop and drop. The two other indicators are reaching an extreme level, which normally tells us a pullback is due in the next 24–48 hours of trading. The question is: Will this just be a bull market pause or will we get a decent pullback?
The red indicator in the top chart and the red indicator levels on the chart below help us time the market as to when profits should be taken or tighten our stops if we have any long positions. The broad market is still in a very strong uptrend, so moving stops up and buying on oversold dips is the way to play it.
Weekend Market Analysis Conclusion
Both gold and the stock market are in a bull market (uptrend). Trying to pick a top to short the market is not a good idea. Instead, I am looking for an extreme oversold condition to help reduce downside risk before taking a long position.
The overall strength of the market—SP500 and gold—are starting to weaken, I think; but in no way am I going to short them. We continue to buy dips until proven wrong because indicators can stay in the extreme overbought levels for a long period. Generally, the biggest moves happen in the last 10–20% of the trend.
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