08/03/05 - TraderMike: Gold - A Long-Term Buy Signal?
On Friday I received a short-term sell signal on gold stocks following back to days of relative weakness in the gold stocks versus the gold shares. This sell signal did not change the long-term bullish picture for gold or make me doubt that gold and gold stocks were still on track to break out and begin wave two of the gold bull market, but I had to heed this sell signal and sell much of my position, because I was heavily on margin.
That is what I do - I try to use short-term buy and sell signals to enter the start of bullish uptrends. And gold stocks are on the verge of beginning a bullish uptrend after spending the last year and a half going sideways. Yes, we've had big rallies and declines during this year and a half. We played the rally from last August to last November and have traded in and out this year, catching some rallies in the process, but all of this has happened in a big picture of a consolidating market. It doesn't feel like a sideways market when you go from one bottom to one top or vice versa, but that is exactly what it has been.
I have been anticipating the start of wave two of the gold bull market since we got a major buy signal in gold stocks on the very day gold bottomed in May. I bought then and have added to my position repeatedly since then until I got margined to the hilt. There were several times that it appeared that the XAU was about to break out only to fail.
This past Friday was the first time I received a sell signal since May. One thing to notice though, the May signal was a major long-term buy signal, this sell signal was short-term, meaning that it could lead to a one to two week decline in the XAU, to the 85 area at most.
That is what I was on guard for and, by the close on Monday, it almost looked like a certainty as the XAU faded into the close again despite gold rallying all day.
Then today, the XAU gapped up while gold dropped! The XAU showed strength. That is the type of things it does when it wants to go up! And now it very well could do so!
When you get a sell signal and you expect the market to pull back and it doesn't, that is a sure sign of strength. Sometimes the market tells you what it is going to do by defying what it seems it is "supposed" to do.
I am on guard now for the possibility that the XAU is going to break out. The sell signal I received Friday could turn out to be a false signal. Those things happen and they happen a lot when they are short-term signals in consolidating markets. I simply had to take it seriously because I had such a large position, but if the XAU breaks out then I am going to buy back all of the stocks I sold and more.
Resistance on the XAU is now at 93 1/2. It had been at the 95 level for the past several weeks, but time has brought the pivot point on the XAU down to a lower level. We are just inches from this level and, if we see the XAU close above it, then it is off to the races. Wave two will begin.
There are things I'd like to know. For example, I'd like to know what the current short position is on the metal. Did the commercials open many more short contracts last week as gold busted above 430? We can't know, because our most recent report is now eight days old. We don't know yet if this recent sell signal is real or not. It looks now like, if it isn't real, the XAU won't pull back much at all due to today's strength.
What we do know for sure though is the importance of the XAU downtrend. It has acted as resistance in November, March, and now twice in July. It has proven that it is real and, when it is broken, wave two is going to begin.
We move above 93 1/2 and I'm buying. We close above 93 1/2 and I'm going to buy a ton. Margin again. Take a look at the weekly chart of the XAU below. Weekly charts give you long-term trends. The weekly bollinger bands are extremely tight now, telling us that a BIG move is going to start soon. You can see the red downtrend line and the two previous downtrend lines that acted as resistance in 2004 and 2003.
We are on the verge of a LONG-TERM buy signal on the XAU. Long-term means a rally that will last for months. A long-term buy signal will negate Friday's short-term sell signal. It is the signal we've been anticipating all year. It can happen at any moment. Either resistance will hold and the sell-signal will prove itself correct or it will fail and the big one will start. I have to be ready to buy and you should be too, if you haven't already.
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