Important Test for Gold

The market continues to roll on as is its tendency seasonally during the period running into January. As we have stated for many weeks, as long as all the major averages don’t break key support and key trendlines, the benefit of the doubt lies with the bulls. Note that our rigid criteria are getting more opportunities in the last few weeks as well, so traders have some areas of investment to consider on these breakouts.

We have argued that despite the intermediate breakdown in the dollar that it is unlikely to break major support in the 78-80 level and that with The Economist cover showing a weak dollar, time may be running out for dollar bears. This week the US economy showed a bit more resilience than many forex traders had been expecting and the EUR in particular has taken a bit of a hit. It is still of course possible for the dollar to fall to its major support area in the weeks ahead and for the EUR to test 1.35-7, but we continue to doubt a new substantial leg down in the dollar that will take it below 78-80 is underway.

We have also been concerned about the implication of the dollar move on other markets and that moves in related markets might be short-lived by the short-lived dollar decline. One of the main related markets is gold. In fact gold and gold stocks look to be embarking upon an important technical test that investors should closely monitor.

GLD, the gold ETF, tested intermediate support at 55 in October and has been rallying off of that level since. At the same time XAU tested substantial support at the 120 level and also has bounced off of that level since early October. But with the dollar no longer falling swiftly, both gold and gold stocks have started to decline and are now facing an important test of the up trend that started in early October. Right now GLD is falling into support between 60-61 on a number of counts – from its intermediate up trend channel, and from the 50 and 200 day ma. XAU, the gold stock index, is in a similar technical situation, with support between 138-141 testing its intermediate up trend channel, its 50 day ma, and its 200 day ma. This test of substantial technical support in both gold and gold stocks is likely to be important. A break by both GLD and XAU below these support levels would likely send both back to test their October lows and would put these vehicles in broad trading ranges rather than directional trends. Such a break would also suggest that the dollar decline may be over sooner rather than later and that a test of 80-78 may not even develop here. Let’s watch this important test closely.

We continue to recommend bond exposure be lightened as TLT’s get above 92 but that bond exposure be maintained as a strong portion of portfolios until evidence mounts that leading economic indicators are turning higher.

Oil stocks are leading the current advance. Even the list of close calls and valid trades via our rigid criteria are showing opportunity in energy related companies like BTJ and CKH. Oil stocks continue basing and showing leading relative strength while oil and natural gas are still formulating bases or trying to find support. We continue to suspect that energy stocks and China region stocks remain prime candidates for a major mania later this decade and that buying these on corrections during the expected soft-landing will make good long-term trades.

The market is running and trading opportunities are growing more ample, yet we still advocate some offsetting bond exposure and a less than aggressive allocation going into an economic growth slowdown that we suspect will only become a soft-landing. Soft-landings can be difficult to trade in a risk averse fashion. Yet if this does develop as we have been suggesting since this summer, it will be long-term equity bullish.

Overall we still continue to suggest less than aggressive allocation to global equities, however we would no longer look to add or accumulate TLT’s on corrections and would begin taking partial profits on TLT’s over 92. We still expect that the slowdown is not over and that the Fed will not letup on a tightening bias until the slowdown develops more clearly so that inflation does not reappear and get entrenched, but bonds gains have been swift and further bond yield declines will become less likely unless a recession develops. The risk of recession is still large enough that we would not suggest selling ALL or even half of TLT’s yet, but some profit taking will soon be in order we believe. We also continue to like some pairs, and some select big-cap dominated groups along with the small number of stocks meeting our criteria for below normal allocation to stocks with partial short-hedging in weaker groups.

Our US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 78, 53, 76, 57 and 57 with 7 breakouts of 4+ week ranges, valid trades meeting criteria in CKH, OMX, BTJ and ININ close calls. This week, our bottom RS/EPS New Lows recorded readings of 5, 4, 7, 6 and 4 with 3 breakdowns of 4+ week ranges, no valid trades and no close calls. SPI, BWP, CHDX, OTEX, OPNT, BRCD, TV, STEC, NUE, CKH, OMX, BTJ, ININ remain open trades on the long side from this methodology.

Mark Boucher has been ranked #1 by Nelson's World's Best Money Managers for his 5-year compounded annual rate of return of 26.6%.

For those not familiar with our long/short strategies, we suggest you review my book "The Hedge Fund Edge", my course "The Science of Trading", my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call "up-fuel", as well as rigorous criteria for potential short stocks that we call "down-fuel". His website is www.midasresourcegroup.com.