The Charts Don’t Lie on Gold

by Sam Collins | July 20, 2010 12:49 pm

Stocks closed higher on Monday, but again volume was very low. Buying lacked conviction, therefore, and even though about a fifth of Friday’s decline was offset, most of the volume was in just two stocks — Bank of America (BAC[1]) and Citigroup (C[2]).

Stocks opened high following better-than-expected earnings from Halliburton (HAL).  But lower revenues continued to dog the broad market.  Hasbro (HAS[3]) and Delta Airlines (DAL[4]) beat estimates but missed their revenue forecasts and both stocks closed lower with DAL off 2.90%.

Moody’s Investors Services upgraded Citigroup and the shares closed 2.1% higher. But Bank of America fell 2.7% which gave the big bank a loss of 11.9% since their earnings report on Friday.

The only economic report of the day was from the National Association of Home Builders. Their index of confidence in new-home sales dropped to its lowest level since April 2009, falling to 14 instead of the 16 that was expected.

Energy stocks led a late rally with Smith International (SII[5]) gaining 4.5% and Schlumberger (SLB[6]) up 4.4%. Quicksilver Resources (KWK[7]) jumped 16.9% on a possible merger with Reliance Industries. 

But the late rally was mostly due to anticipation of better earnings from 17 companies that were scheduled to report earnings after the close. IBM (IBM[8]) and Texas Instruments (TXN[9]) are two of the larger companies that analysts say should beat both estimates and revenues and possibly set the pace for a continuation of Monday’s rally. But following the close, IBM reported that their Q2 earnings increased by 9.1% but revenues fell short of estimates. Texas Instruments shares fell in after-market trading following their quarterly report which met earnings and exceeded revenue estimates.

The Dow Jones Industrial Average on Monday rose 57 points to 10,154, the S&P 500 gained 6 to 1,071 and Nasdaq was up 19 points, closing at 2,198. The NYSE traded 955 million shares with advancers leading decliners by 1.8-to-1. Nasdaq crossed 498 million shares and advancers there led by 1.4-to-1.

Crude oil for August delivery rose 53 cents to $76.54 a barrel, and the Amex Energy SPDR (XLE[10]) gained 33 cents to $52.06. August gold fell $6.30 to $1.181.90 an ounce, its lowest level since May as money flowed to other assets. The PHLX Gold/Silver Index (XAU[11]) lost $2.14, closing at $165.25.

What the Markets Are Saying

As one of my favorite technicians, Michael Ashbaugh, put it, “While the recent market price action has been undeniably volatile, it’s also been distinctly technical.” What Michael means by that is that despite the wide, maddening swings the market has reacted predictably. For example, last week, despite an impressive rally when it bumped into the very obvious resistance of the 200-day moving average and the main bearish resistance line, each major index reversed almost exactly at it hit its respective technical barrier.

And, as repeatedly noted, volume on rallies has consistently been lower than the volume on declines which is a fairly obvious clue that the bears are in control of things.

Which brings us to a more difficult set of charts represented by a group that should do well when the economy and the rest of the stock market are under stress: I’m of course referring to the recent price action of gold. Earlier this year gold rose as tensions in Europe and Asia increased and was often cited as a refuge while other stable investments crumbled.

First let’s examine the technical action and then we’ll discuss why gold has been a poor recent performer.  Early in July the SPDR Gold Trust (GLD[12]) fell through both the 20- and 50-day moving averages. Then, last week a low volume rebound failed to overcome the 50-day moving average, and GLD began to look more like the S&P 500 than the store of value that we normally expect. But an examination of the long-term charts shows that the uptrend is still intact and what we are focusing on is merely an intermediate correction with support at around $110 for GLD. One of the reasons for the decline to U.S. holders is the recent rebound in the euro which began in late June. This makes sense since gold (to us) is priced in U.S. dollars. In other words if you are a European your gold rose during this period as the euro advanced due to a perception of a recovery in Europe and the link between the currency and gold. Plus there has been a perception that most of the disappointing economic data in the U.S. is behind us and thus this “safe haven” is not so necessary. 

Our Trade of the Day is a monthly chart of GLD[13] which clearly shows that the long-term uptrend is intact.  

Today’s Trading Landscape

Earnings to be reported before the opening include: A.O. Smith, Astec Industries, Bank of NY, Biogen Idec, Cirrus Logic, Forest Labs, Goldman Sachs, Harley-Davidson, Illinois Tool, Johnson & Johnson, Labranche, Marshall & Ilsley, Meridian Bioscience, Metals USA, MGIC Investment, Millicom, Neogen, Omnicom, Peabody Energy, PepsiCo, Polaris Industries, Schiff Nutrition, State Street, TD Ameritrade, Texas Industries, UAL, UnitedHealth, Weatherford, and Whirlpool. After the close: Allegiant Travel, Allscripts-Misys Healthcare, Altera, AptarGroup, Boston Scientific, Cintas, CNH Global, Cytec, Fidelity National Information Services, Fulton Financial, Gilead Sciences, Hancock Holding, Juniper Networks, Linear Technology, Manhattan Assoc, Marten Transport, Pinnacle Financial, Platinum Underwriters, RC2, Resources Connect, Saba Software, Seagate Technology, SLM Corp, Stryker, Tempur-Pedic, United Rentals, VMware, Waste Connections, and Yahoo!

Economic reports due: ICSC-Goldman Store Sales, Housing Starts (the consensus expects 0.580 M), and Redbook.

Triple-Digit Profits No Matter What the Market Does — You are not at the mercy of the markets. You can start adding triple-digit winners to your portfolio now if you’re ready to embrace the new rules of investing. Here’s how to make money every day in up markets AND down[14].

  1. BAC:
  2. C:
  3. HAS:
  4. DAL:
  5. SII:
  6. SLB:
  7. KWK:
  8. IBM:
  9. TXN:
  10. XLE:
  11. XAU:
  12. GLD:
  13. Trade of the Day is a monthly chart of GLD:
  14. Here’s how to make money every day in up markets AND down:

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