With earnings season kicking into high gear next week, I am keeping a close eye on gold for signs of possible risk aversion trades. As I discussed on April 2, the near-term inverse correlation between stocks and gold during price corrections in stocks is consistent. In other words, a quick 1%-3% correction in stocks often leads to a pop in gold, while the longer-term correlations between the two asset classes are much more random.
On the longer-term chart of gold, as measured by the SPDR Gold Shares (NYSE:GLD), we see major support hanging around the $148-$149 area. Through this lens, also note the series of lower highs off the September 2011 top. What ultimately is needed to turn the chart of gold lower, and in my humble opinion, what will occur, is a lower low by breaking below the $148-$149 support area.
In the meantime, however, a trade to the long side appears to be setting up. The daily chart below shows the ETF had a nice gap higher on Friday, April 5, on the back of the weak March jobs report.
On Tuesday, despite the strength in stocks, GLD continued to move higher and right into a first downtrend resistance line. Could some money be taking a little cautionary posture ahead of next week’s earnings avalanche? And if we look at the stochastics, momentum also looks to have plenty of room above. Traders could buy on a break above $154.50 for a long-side play.