The past week has been interesting, to say the least. Gold is trying to find support while the S&P500 grinds its way higher. Let's jump into the charts and analysis to get better feel for what I see is happening here.
Gold Four-Hour Chart
As you can see from the chart below, gold has formed a possible double top. The fact that it made a higher high is actually a bearish sign for the intermediate term 1-3 weeks. When we see a higher high getting sold into with big volume, it typically means the big money is unloading large positions into the surge of breakout traders and short covering that occurs when a new high is reached. Following the big money is very important, as it can warn us of a possible trend change before it occurs.
The current selling volume is not exactly a healthy sign, if you are looking for higher prices in the near term. If this pattern breaks down, I would expect $1,340 to be reached very quickly.
Keep in mind gold is in a strong up trend still. Shorting is not the best play, in my opinion. I prefer to see a pullback that washes the market of weak positions, then I would jump on the long side for another bounce/rally.
S&P 500 Market Internal Strength
I watch these charts to get a feel for the overall market strength on a short- term basis. The top chart shows the SPY ETF breaking above a resistance trend line on Friday afternoon. This occurred on light volume, meaning it is most likely a false breakout and Monday we could see a gap lower at the open or a pop & drop. The two other indicators are reaching an extreme level, which normally tells us a pullback is due in the next 24-48 hours of trading. The question is, will it just be a bull market pause or will we get a decent pullback.
The red indicator in the top chart and the red indicator levels on the charts below help us time the market as to when profits should be taken or to tighten our stops if we have any long positions.
The broad market is still in a very strong uptrend so moving stops up and buying on oversold dips is the way to play it.
Weekend Market Analysis Conclusion
In short, both gold and the stock market are in a bull market (uptrend). Trying to pick a top to short the market is not a good idea. Instead I am looking for an extreme oversold condition to help reduce downside risk before taking a long position.
The overall strength of the market (S&P 500 and gold) I think are starting to weaken, but in no way am I going to short them. We continue to buy dips until proven wrong because indicators can stay in the extreme overbought levels for a long period of time. Generally the biggest moves happen in the last 10%-20% of the trend.
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Written by Chris Vermeulen
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.