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Gold, Stocks, and Bonds: A Technical Check-Up

Judging the market conditions of the three major asset classes

by 5/6/2013 9:56:31 AM
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The following is a reprint of the market commentary from the May edition of The Option Advisor, published on April 25. Prices and the charts are as of the close on April 25. For more information or to subscribe to The Option Advisor, click here.

Many technical analysts maintain that "It's all in the charts," and while this is generally a bit of an exaggeration, I have attempted in the accompanying 3 charts to come as close as possible to making it so. These charts track the weekly price action over the past 2 years in the SPDR Gold Shares ETF (GLD), the S&P 500 Index (SPX), and the iShares Barclays 20+ year Treasury Bond ETF (TLT).

You will note from the various chart headings that I am characterizing the market condition for the GLD as "bearish," while evaluating the S&P to be "bullish," and TLT as "neutral." And in the body of each chart, I list in bullet point form the basis of my assessment of these markets, along with various "key levels" -- above and below current prices -- I feel are worthy of your attention. As a trader, I believe more than ever that constructing the key levels for any instrument in which you have a position (or are considering one) is absolutely essential -- for establishing solid entry points, as well as for avoiding the tricks our emotions can play on us that can present major obstacles to exiting positions at optimal levels. And, in many cases, identifying the right levels can help us identify whether bull or bear market conditions are in effect.

One factor that is never "in the charts" is the extent investors are committed -- both financially and emotionally -- to a particular market. And an accurate gauge of investor sentiment can provide you with strong clues on whether the most pristine bull market as depicted on the charts will have sufficient buying power from which to draw in order to be sustainable. A classic case has been the recent implosion in the price of gold. I characterized GLD back on Feb. 1 as having "the clearest bull market chart" (as compared to stocks and bonds), but the huge degree to which gold market participants (from individual investors to hedge funds) were already committed to rising gold prices rendered GLD very vulnerable to a sharp correction. And the "true believer" nature of this bullish gold commitment is on display even in the wake of the devastating decline, as many gold advocates cite market manipulation as the culprit.

(Note: All charts below courtesy of Trade Monster -- click to enlarge. The 40-, 80-, 160, and 320-week moving averages are included in white, green, red, and yellow, respectively.)

Weekly chart of the SPDR Gold Shares ETF (GLD) since April 2011

And speaking of gold advocates, is there even such a thing these days as "stock market advocates," despite the recent run by the S&P to all-time highs? While this is overly simplistic as a sentiment gauge, it is a fact that the disbelief with which gains in the equity market are greeted, and the ongoing extreme focus on instruments of "portfolio protection," are a strong indication that there is much in the way of sideline money that can flow into equities before a market top is in place.

Weekly chart of the S&P 500 Index (SPX) since April 2011

Finally, there is the bond market, which from the action in the TLT chart appeared to be moving out of bull market and into bear market status (and whose bull market I had graded "C" back on Feb. 1). The recent TLT rally has, by my reckoning, now rendered the overall picture "neutral", and I would carefully track the key levels on the accompanying chart for further clues.

Weekly chart of the iShares Barclays 20+ year Treasury Bond ETF (TLT) since April 2011

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