Is Gold Finally Turning Up?

The S&P 500 enjoyed another bounce last week, this time jumping about 2.3%. This brings the S&P almost back up to its all-time highs after dropping in the mid single digits at the end of January and the beginning of February. The problem, as usual with most of the multi-year really, is that volume was light. So not only were mom and pop missing this recent two-week bounce, but they were still busy running for the exits in the aftermath of the recent dip. Investors pulled out billions of dollars from stock funds in January and early February. Volatility, as one would expect, also dropped, but it didn’t quite return to the multi-year lows reached periodically throughout 2013. In other words, investors are still showing some nervousness.

Technically, the S&P 500 is now almost back to it’s highly overbought condition. This is the case on both the daily charts and the weekly charts. This should give bears some hope that a pullback from the bounce is now becoming more probable. In the bulls favor are the long term moving averages. Because the S&P has now bounced for two weeks in a row, it has jumped  back up, comfortably, over the 50 day moving average. Also, not only was the 200 day moving average never broken, but it’s also still sloping upwards….and comfortably so. As a result, the bulls may now, once again, feel like they’re in charge.

In US economic news, the data was almost exclusively bad last week. Wholesale trade results missed expectations by 50%, growing by only 0.3% as opposed to the predicted 0.6%. Initial jobless claims were higher (worse) than expected. Retail sales missed badly. And even retail sales ex-autos missed. Industrial production was the shocker of the week. Instead of growing 0.3% as predicted, it dropped by 0.3%. This was the biggest miss since the summer of 2012. Needless to say, the US economy is not recovering in the traditional sense of the word.

Interestingly, one market that we’ve touched on repeatedly has just passed a major milestone. After peaking in mid 2011 at about $1,925 gold first fell below its 200 day moving average in late 2011. Then after see-sawing above and below the 200 day throughout 2012, gold finally crashed below in early 2013. And it has stayed below the 200 day ever since.

Until last week.

After dipping below $1,180 in June 2013, gold rebound somewhat, but stayed within a downward trend. Then after revisiting $1,180 at the very end of 2013, gold has been on a tear, rising almost every week in 2014 making it one of the largest price gainers so far this year, along with silver.

But most importantly, after testing (and successfully holding) the lows of 2013, gold closed above its 200 day moving average last week.

Why is this important?

Because if trades and investors use technical analysis at all (and almost all commodity traders do), then they will almost always start with the 200 day moving average. Assets that trade above their 200 day moving averages (especially when those averages slope upward) are said to be in a bull market and assets trading below their 200 day moving averages (especially when those averages slope downward) are said to be in a bear market.

So by closing above its 200 day moving average, gold has made its first major step to re-entering a bull market. If the move up in price is strong enough, it will be able to turn to slope of the 200 day up as well (it’s still sloping downward). And if this happens, then gold will attract a lot of traders and investors who will see an “all clear” signal to buy.

The next several weeks should give us this answer.

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