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by Carson Dahlberg, CMT
Special to the TradeTech Blog
I am writing this on 12.29.2011 during Thursday’s regularly scheduled session. There are few interesting things lining up that I have observed worth sharing about gold. These line up the odds and make this a very interesting observation with the potential for a lot of market participants being on the wrong side of a pullback in a long term uptrend. This is also an example of using multiple facets of technical analysis in a quantitative and objective way; avoiding multi-colinearity.
This part is subjective, but there’s been extremely negative sentiment on both the miners and the commodity, with a ton of “most read news” recently (there is also a significant increase in the frequency of news). Usually the print media ramps it up at the extremes. This is shown on the intraday chart of the Gold Continuous Contract below.
The Junior Gold Miners Index is also now coming to multi time framed support (volatility and volume-based). From a smart money/large options trading point of view, big bullish bets on the GDXJ (Market Vector Junior Gold Miners Index) occurred over the last couple of days. It usually pays to watch for this kind of options activity because typically the smart money will leverage their ideas in the options market.
The Gold Continuous contract is now coming to multi time-framed support (derived from volatility and volume). The green shaded areas are showing where the projected buying pressure is. This is from work we do to validate volatility based support levels through transactional analysis.
Below are the weekly and daily Gold VIX charts. The trend still looks down in the near term (daily) with a multi time framed range between 19-33. As a side note, be careful not to commit the sin of thinking that a volatility chart is always in an inverse correlation relationship with the underlying. However, a falling volatility environment typically does mean less fear and smaller moves going forward.
Finally, the comparative relative strength chart of (GC1GOLD)/SPX(S&P500) is nearing support as well as being extremely oversold. This adds an additional dimension of analysis, from the point of money flow heading to an outperforming asset (Gold is set to be one of the best performer asset classes this year, only outdone by US10Yr, Brent Crude Oil, and the German 10yr Bund, and of course volatility – VIX).
To summarize, we’ve applied analysis on sentiment, options activity, trend and momentum, support and resistance, and volatility (implieds) using volatility-based technical analysis. Looking at the technical clues of what gold will do, they all point to the probability that gold could be due for a pause/reversal of its precipitous downtrend. This has also been an example of how technical analysis can be used objectively to get a holistic, robust view of a market or security.
Carson Dahlberg is the Chief Technical Strategist and Partner at Northington Trading, LLC.
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