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Is It Time to Buy Gold?

I've been bearish on the metal since February, but it's impossible to ignore what's happening on the charts


“Quadruple witching,” the expiration of contracts on stock index options, stock index futures, individual stock futures and individual stock options, brought increased volume to the stock market Friday, but not much in the way of upward progress. According to The Wall Street Journal, Friday “marked the 45th straight day the S&P 500 closed up or down less than 1%, the longest stretch since 1995.”

Following its two-day policy meeting, the Federal Reserve remained “accommodative,” as expected. And the European Central Bank (ECB) mirrored the Fed’s approach.

Although stocks moved ahead, one major technology issue capped what could have been a bigger advance. Oracle (ORCL) fell 4% after reporting fiscal Q4 earnings and revenues that fell short of expectations. Darden Restaurants (DRI) also fell 4% after an earnings miss.

The health care sector continued its advance with biotech leading. The iShares Nasdaq Biotechnology (IBB) rose 2% Friday, and the ETF is now up nearly 7% so far in June.

At Friday’s close, the Dow Jones Industrial Average was up 26 points to 16,947, the S&P 500 rose 3 points to 1,963, and the Nasdaq gained 9 points at 4,368. The NYSE’s primary market traded 1.7 billion shares with total volume of 4.1 billion shares. The Nasdaq crossed 2.5 billion shares. On both major exchanges, advancers outpaced decliners by about 1.3-to-1.

For the week, the Dow rose 1%, the S&P 500 gained 1.4%, and the Nasdaq was up 1.3%.

GLD Chart
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Chart Key

Although the major indices made minor progress, there were several sectors that came alive after months of not participating in the bull market. Gold’s breakout follows a week in which the Fed’s policy language indicated that the U.S. economy is improving, with inflation expected to rise.

I’ve been negative on gold since February, but it is impossible to ignore the bullish island reversal on SPDR Gold Shares (GLD) and the size of the May and June gaps, which usually define the extent of an expected move up.

With a trading target of $132, I’d like to buy GLD lower — at around $124 — but a partial position now will ensure that you will participate in a follow-through rally.

RUT Chart
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On the Russell 2000, a series of bullish flags and a huge “V,” as well as a bullish MACD and the break of the resistance line at 1,181, suggest that the rally in small caps will continue.

Conclusion: High volume usually is viewed as supportive of a breakout. But Friday’s higher volume simply resulted from the quadruple witching expiration.

That’s not to say that the new highs are suspect, since we’ve been dealing with abnormally low volume all year. The fact is simply that there are buyers on balance and no one wants to sell. Thus, the bull market took on new strength last week as mid- and small-cap stocks rallied.

The market appears to be ignoring the crisis in Iraq, and from an investment standpoint, so should we. Be long or be wrong.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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