Gold Continues to Form Bullish Pattern

The S&P500 bounced back after two consecutive weekly losses. Last week, the large cap index gained about 0.9%, and in the process, it set new all-time highs. Volume was very light, but that had more to do with the Thanksgiving holiday than with investor sentiment. Meanwhile, super low complacency returned to the S&P—the VIX index fell back not just to levels  below 10, but it dipped below 9. Needless to say, this is extremely low, by historical standards.

In US economic news, the reports were mixed. Leading indicators and the Chicago Fed national activity index both beat their respective consensus estimates. On the other hand, durable goods orders missed—both headline and core results disappointed. Also, PMI composite flash missed expectations. This week, with no holiday interruptions, a much larger and more normal number of reports will be released.

In terms of technical analysis, the S&P500 is once again stretched—seemingly—to the upper reaches of normal pricing levels. On both the daily and the weekly charts, last Friday’s closing price pushed the index back up to the upper Bollinger Bands.  Prices are also clearly above the 50 day and 200 day moving averages, which themselves are comfortably sloping upwards. So if it weren’t for the fact that valuations are now stretched to the upper 5% – 10% of most major measures, then the obvious conclusion one should draw from the technicals is that the bull market is in effect and that the average investor should maximize his or her allocation to US equities. But since valuations are also so obscenely high, again according to long-term historical measures, the average investor should instead be extremely cautious about being overly invested in US equities, because with these current conditions, any sort of pullback could become more severe than usual.

Finally, the bullish pattern that gold began to form in 2016 (after suffering from a bearish pattern since 2012) appears to be strengthening. After bottoming at the end of 2015, gold has essentially been tracing out a new uptrend. The lows reached after the lowest low of 2015, have been higher than this low of 2015. The 200 day moving average is now sloping upwards. The 50 day has crossed above the 200 day (“golden cross”. All that remains for this apparent bullish pattern to be fully confirmed is for prices to rise above the highs reached in 2016; this would confirm an inverted head and shoulders formation—a strongly bullish signal—especially when seen on longer term resolutions such as the weekly charts.

So the big test for gold will be roughly $1,375. If this price is reached and if it sticks, then pretty much all the major barriers to much higher prices will have been removed. After $1,375, gold’s next targets would be$1,550 and after that the upper $1,700’s where many of the late-comers to the prior bull run bought gold and would now consider selling because they’ve returned to break even.

 

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