Gold and the Ideal Buy Point

We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.

Next month marks the 3-year anniversary of the bear market in silver that started in May 2011. Later this summer we will hit the 3-year anniversaries of the bear markets in gold and gold stocks. We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.

In reality though gold has been in a basing phase. It’s not going down anymore, it’s going sideways where the downward plunges are muted and the upward rallies are still fake bear market rallies. What’s interesting about this base is that it started right at the height of bearishness in the gold market. That two day massacre in gold back in April 2013 when gold plunged below $1400 actually started the left hand side of the base. So right when everyone was panicking about gold, in reality it was starting to form a major bottom!

Just a couple months later after trying and failing to get back above $1400, gold made the low point in the base in June of 2013 around $1200. Gold then tried once again to get back above $1400, but then failed and retested the bottom of the base in December 2013. So a well established base formed in gold between $1200 and $1400 as you can see in the chart below.

Once gold held support again in December 2013 it rallied back to $1400 just last month, but then failed again and was turned back down to where it is today. So gold has been basing now for about a year between $1200 and $1400. Notice though in the previous chart the 30-week moving average has flattened out, and gold has now traded back above the 30-week moving average. Stan Weinstein, author of one of the best books ever on trend trading called “Secrets for Profiting in Bull and Bear Markets”, would call this a Stage 1 base.

Gold stocks have done essentially the same thing as gold. They started forming the left hand side of a base in April 2013, then traded mostly sideways for the rest of the year. Some of the gold stocks went on to make lower lows during the rest of 2013 but most of the damage had been done by the April-June time frame.

Taking a look a the GDXJ Junior Gold Miners ETF notice how the 30-week moving average has flattened out just like it has in gold. After going back and reading what Weinstein said about Stage 1 bases recently I noticed this quote which might relate to what we are seeing in the gold stocks today:

“But often volume will start to expand late in Stage 1, even though prices remain little changed. This is an indication that dumping of the stock by disgruntled owners is no longer driving down the price. The buyers who are moving in to take the stock off their hands are not demanding any significant price concession. This is a favorable indication.”

Notice the tremendous increase in volume in GDXJ since the start of 2014. As Stan says this is an indication that buyers and sellers have reached equilibrium. So after a year long base in gold and gold stocks, what were are looking for next is the breakout into a Stage 2 advance.

The ideal buy point, according to Weinstein, is when gold would breakout above the resistance of its base and above the 30-week moving average on above average volume. This would indicate buyers have taken back control of the gold market and a new bull market in gold is going to begin. Weinstein notes that there is often a retest of the breakout point during which a second chance opportunity arises to do low-risk buying.

Checkout what the solar stocks did from April 2012 to April 2013. They had a similar basing period to the current gold market. The solar ETF TAN based for about a year then broke out of the base on an increase in volume in May 2013. Then TAN retested the base towards the end of June 2013, and from there broke back into the Stage 2 advance that is still ongoing today. This is a great example of Stage Analysis in action.

So the bottom line is gold is in a basing phase, and this has been going on for about a year since April 2013. According to Stage Analysis the ideal buy point would be the breakout above $1400 on an increase in volume, or on a retest of $1400 after a breakout occurs.

Justin Smyth of Next Big Trade, Guest Contributor to Connect with him on Twitter: @nextbigtrade


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