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Is the gold breakout for real? [SENTIMENT TRADER]
The confirming (or non-confirming, as the case may be) indicators detailed above do not inspire great confidence at the moment.
Key points
- Gold has broken out to a new all-time high (which is one of the most bullish things any security or market can do)
- At the same time, the Gold/SPX Ratio remains mired in a downtrend
- Likewise, gold is still technically in the unfavorable portion of the 8-year cycle
- While the bullish trend retains the benefit of the doubt as long as the price holds above the breakout point, the lack of confirmation may be a cause for concern if the breakout fails to hold
A new all-time high
One unwritten rule in trading is “never fade a new all-time high.” Like most investing “rules,” there are exceptions. But generally speaking, when a security initially breaks out to a new all-time high in price, it is better to go with the trend than to try to fight it.
After trying literally for years to do so, gold recently punched above resistance and traded at a new all-time high price.
What the research tells us…
The oldest adage in trading is “The trend is your friend.” Currently, the trend for gold objectively has to be designated as “favorable.” And with gold at a new all-time high, it may be dangerous to fade the trend. But the other question is, “How confident should we be that the uptrend will continue?” The confirming (or non-confirming, as the case may be) indicators detailed above do not inspire great confidence at the moment. If history is a guide, the current rally for gold may run out of steam. However, that is not a prediction – just words of caution.
Fortunately, the proper course of action for traders looking to play gold is pretty straightforward. As long as the price of gold holds above the recently pierced resistance level, seasonal and cyclical factors should be ignored, and the bullish case should be given the benefit of the doubt. However, if the breakout fails and gold falls below the breakout level, a much more cautious (or even outright bearish) stance might be in order.
The great Sentiment Trader OPINES
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