At the risk of beating a dead gold bug, let’s take another look at the precious yellow metal today.
I should be angry with gold. After all, it’s making me look bad.
The price of gold has fallen $30 per ounce since last Thursday when I declared “Here Comes the Gold Stock Rally.” But in hindsight, I was a bit too enthusiastic.
The price of gold has made an important intermediate-term bottom sometime between April and June every year for the past seven years. So, when gold rallied following the FOMC announcement last week, I figured the May low at $1281 per ounce was THE bottom.
But, like I said on Monday, the financial markets never make it easy.
Gold dipped as low as $1,273 per ounce yesterday before rebounding and closing just below $1,279. This drop to a new low has many traders looking for gold to move even lower. That’s often what happens after a chart breaks down.
But gold doesn’t trade like most financial assets. It’s much more emotional.
Many of the folks who buy gold do so because they believe the financial world, as we know it, will eventually end. The pressures of negative real interest rates, trillion-dollar budget deficits, and hundreds of trillions of dollars in unfunded liabilities will eventually take its toll. In short, they expect the world to end.
And, in my experience, folks anticipating the end of the world tend to be just a bit high-strung… and more than a bit emotional. So, it’s that emotion that creates buying and selling opportunities in the gold market.
And one of the best buying opportunities for gold occurs whenever the price closes below its lower Bollinger Band.
Bollinger Bands represent the most likely trading range for a stock or an index. So, whenever an asset closes below its lower Bollinger Band, it represents an extremely oversold situation. It may not be the absolute bottom in price for that asset. But it’s usually close enough to the bottom that traders can buy without worrying about the possibility of a devastating loss.
That’s where we are right now with gold.
Take a look at this chart of the price of gold plotted along with its Bollinger Bands…
The red arrows on the chart point to each time over the past year gold has closed below its lower Bollinger Band. That action didn’t always mark the absolute bottom of the decline. But it was close enough to the bottom that anyone who bought gold when it closed below its lower Bollinger Band was profitable a week or two later.
That’s the situation we have today.
Gold closed below its lower Bollinger Band on Monday. That may or may not mark the bottom of the recent decline. But we’re now close enough to the bottom that traders should be willing to step up and buy gold.
This is just one more reason to be leaning bullish on gold over the next three months or so.
Best regards and good trading,
Jeff Clark
Reader Mailbag
To lead today’s mailbag, a Delta Report subscriber writes in…
I love your wisdom, even when trades don’t work out. It’s just part of trading options. Some of your subscribers just need to grow up and realize that. I think it’s amazing how you honestly go through your thinking on a trade, that way everyone is completely informed and can only blame themselves for risky trades not working out.
Jeff, I have at least 10 newsletter subscriptions, mainly on gold and silver, and I read every word you say. You are the best of the best. Thank you.
– Gregory
Also, a Market Minute reader shares their alternative gold strategy…
I’m holding puts, predicting and hoping gold will hit bottom at $1,240 or $1,200 and I will be able to see it and sell out. (All while playing “Devil’s Advocate” and remembering wise advice to myself: “It’s a dangerous thing to bet against Jeff Clark!” Better watch out and be ready to bail out!)
Thanks for your emails!
– William
And another takes a friendly jab at yesterday’s ill-timed analysis (written before the China tariff news)…
Boy, you really nailed this one… NOT! 🙂 Down over 300 points overnight!
The reason you say it’s bullish could also mean bearish through absorption, which is clearly what happened. “The S&P 500 has been marking time. It’s been hovering near the 2770 level for the past several days” That could also be classic absorption (bearish) which is the case.
– Wade
Jeff: Hi Wade. Thanks for your comment.
I can certainly see the bearish case in the action as well. But, I still think the odds favor the bulls.
Having said that, though, I wasn’t using yesterday’s essay to tell folks to rush out and buy stocks. In fact, I thought this part at the end of the essay was pretty clear…
Traders should take advantage of any declines this week – especially declines that knock the S&P 500 down to its 20-day EMA – as a chance to go long.
That’s where I’ll be buying.
The 20-day EMA was at 2754 yesterday. Traders who stepped up to buy at that level looked pretty good by the end of the day.
Thank you, as always, for your thoughtful insights. Keep them coming right here.