I wrote about how the “smart money” turned cautious on gold three weeks ago.
And now, one of my favorite gold trading indicators just flashed a warning sign.
So, no matter how much I love the metal, and how confident I am that the price of gold will be much higher in the months ahead… traders should be careful here.
We may have a much better chance to buy gold at lower prices in the days and weeks ahead.
Take a look at this ratio chart that compares the action in the gold stocks to the action in the metal itself…
Gold does best when the gold stocks are outperforming the metal.
When this chart is moving higher – making a series of higher highs and higher lows – gold stocks are outperforming gold. That’s usually the best time to be invested in gold.
When this chart is moving lower – making a series of lower highs and lower lows – gold stocks are underperforming the metal. That’s when gold tends to behave poorly.
Since late January, this chart has been moving higher. And gold has been strong – rallying from $1,790 per ounce to over $2,000 per ounce three weeks ago.
But this ratio chart is now quite extended. It’s at its highest point in a year, and it just turned lower.
It still shows a pattern of higher highs and higher lows. So, the overall trend is still higher.
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But, with the commercial traders turning cautious – and with this ratio chart in an extremely overbought condition – traders need to be aware of the potential for a short-term move lower for gold.
If this ratio chart makes a lower low – below the late March low – then this chart shifts from bullish to bearish. If/when that happens, the price of gold will likely be headed lower in the weeks ahead.
That doesn’t mean you should go out and sell all your gold… I still think the price will be much higher in the months to come.
But, if you’re looking to buy more gold, chances are good you’ll have a better opportunity to do so a few weeks from now.
Best regards and good trading,
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Jeff Clark
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Reader Mailbag
In today’s mailbag, Jeff Clark Trader subscriber Scott shares his thoughts on Eric’s recent essay about stock splits…
About Eric’s April 1 article on stock splits:
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The only reason I’ve heard about why the split itself might cause a stock’s price to rise that makes a lick of sense to me is that by lowering the price of an individual share, small buyers are better able to buy shares, increasing demand for them.
For example, if you’ve got $1,000 available that you’d like to invest in Company A that has a stock price of $750, then you’ll be able to buy one share and only invest $750. If the stock does a 10-to-1 split to $75 per share, you can buy 13 shares, for a total investment in the stock of $975. Maybe this explanation makes one lick of sense, but not much more.
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Now maybe the split is telling us new, positive information about the stock. When examining post-split performance, Eric correctly backs out overall market performance to see if split stocks outperform the market. He finds that split stocks tend to magnify subsequent market performance.
That makes sense. Stocks are split when their per-share price gets really high, which means that these stocks have been high-performers. That would put them disproportionately in the high-volatility growth stock category.
And these are stocks that would tend to disproportionately keep growing big or flame out big. That’s the hypothesis I’ll throw out there, but I don’t have the wherewithal to test it, or even to investigate whether anyone else already has.
In any case, this tells us nothing new. We can readily identify growth stocks already, long before their share price grows to a point where a split might make sense.
So, I buy Eric’s conclusion: Don’t add having a stock split to your existing set of stock-buying criteria, be they technical, fundamental, or both.
Thanks Eric, Jeff, and all the rest for the great and thought-provoking content!
– Scott G.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].