Gold? Yes, but not yet.

The S&P500 stumbled last week, dropping 1.6% on growing volume, the third consecutive week of losses.  So far, the turning point appears to be gaining strength.  And with the S&P closing at 1074, a minor level of support was clearly broken.  The next major level of support, at 1020, will now become the big test.  If the S&P approaches and then crosses this level, then we could easily witness a major drop into the mid 900’s as stock owners rush for the exists and bears pile on with short selling.

The economic data mixed, which is a bad omen for the stock market, because it sold off even when good news was announced.  Existing home sales and new home sales were much lower than expected; this should not be a surprise to those who correctly saw through the temporary nature of government gimmicks (tax credits) to boost home demand.  Consumer confidence and consumer sentiment were both better than forecast.  Durable goods orders disappointed, and initial claims were also weaker than anticipated.  The first estimate for Q409 GDP came in better than expected, but revisions will likely trim this figure, and more importantly, many economists expect that the growth rate for 2010 to drop meaningfully.

Technically, the S&P is slightly oversold on the daily charts.  A small bounce back rally would not be surprising.  On a weekly basis, the long-term topping formation is just about complete; if the S&P falls another 40-50 points over the next several weeks, then a strong correction will be in effect.  The monthly charts are still maintaining the 2+ year downtrend; so far, the 9 month rally has been a cyclical bounce in a secular bear market.

Gold, on the other hand, is in a secular bull market.  And given the massive monetary and fiscal programs deployed by much of the developed and developing world, many investors are rightfully worried about all fiat currency and its ability to be a store of value. 

Yet gold has acted as a strong alternative to paper currencies.  Although gold does not yield a cash flow (interest or dividend), it has risen several hundred percent in the early 2000’s, far outpacing the appreciation of the S&P500’s near zero growth over the same time period.

But gold has jumped a lot over the last four months–from about $900 per ounce to over $1200 per ounce, only to fall back to about $1080 as of last week.  Is this a good time to buy?

Not yet.  At $1080, gold has fallen back to a major resistance level, while the U.S. dollar has soared over the last two months.  If the dollar continues to rise–and any global shock, such as a debt crisis in Greece, will surely push the dollar higher–then gold will come under severe downside pressure.  And because gold is sitting at technical resistance levels, a slide just below these levels would mean that it could then fall much further.  The next resistance level would be at the $1030 level, and if it breaks below that, then it could fall much more–into the low $900’s or even into the $800’s.

The good news is that the long-term uptrend line for gold is now around $700.  So gold could fall all the way down to $750 per ounce and NOT break its multi-year uptrend.

The bottom line:  there is a good chance that gold will drop further over the next several months, offering investors a much better buying opportunity.  If the price falls, investors should consider buying.

The lower prices may not return for years, if ever.

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