Gold: Keep Holding Long Deltas
Gold looks to be in the middle of its intermediate decline.
We could bottom, though, earlier than many expect.
The rally in the dollar is already losing momentum, which should be bullish for gold.
We wrote about gold recently and stated that we believed the yellow metal had started its intermediate decline. We also have stated though that we believe it is very important for traders to keep some type of long delta position in this asset class at present. We remain long GLD, which is an unleveraged ETF which tracks the price of gold.
The benefit of being unleveraged is that it lessens the pain in case we get a steep correction into an intermediate low. Gold is now 29 weeks into its intermediate cycle. We have a clear weekly swing high, and the precious metal is definitely in its timing band for a decline into an intermediate low.
However, if we look at a 4-year weekly chart and focus in on a recent intermediate low, we can see that the 2016 mid-year low did not come down to expected levels. This was due to the thrust of the rally out of the bear market bottom in commodities. Traders who liquidated their holdings early would have had to play catch-up if they wanted to catch the rest of the intermediate cycle as shown below.
Traditionally, an intermediate trend line break would be needed before an intermediate bottom. Also, the weekly slow stochastics indicator would have to come back to oversold levels (at least under 40). The 200-day moving average looks a likely target at this stage due to its proximity to that trend-line.
How the US dollar is cycling can give us clues as to where gold may print its intermediate bottom. Gold usually falls when the greenback rises. Furthermore, if we were to see that the greenback was rallying out of an intermediate bottom, for example, then there would be a strong possibility of that intermediate trend-line being broken to the downside.
If we look at the weekly chart of the dollar, we can see that the currency last printed intermediate cycle lows in February and September of last year. The question is whether the low at the start of this year spawned a new intermediate cycle. It certainly satisfies the conditions which were:
A break below and close above of the 10-week moving average A weekly swing low Weekly technical indicators such as the RSI and stochastics becoming oversoldThe only doubt is whether the greenback was in its timing band for an intermediate low.
The dollar is now into its eighth week since bottoming on the 9th of January this year. Either way, in these type of situations (where it can be difficult to get a read on the cycle count), we look for possible divergences which could be preempting a trend change.
As we can see from the weekly chart below in the dollar, the RSI indicators since the middle of last year have been losing momentum. Although the greenback has been making higher highs over the past 6 months or so, the momentum indicators have not been following suit.
In fact, the same pattern which took place from 2015 seems to be taking place at present. The dollar is not reaching sufficient levels of momentum in order for a rally to be sustained. It is quite common for divergences to take place before the actual index turns over.
This over the long term should have ramifications for gold which is why it is dangerous not to be holding some type of long deltas in gold. The dollar, once it broke below its 2016 lows, broke long-term support. At present, it is trying to make a comeback, but its rally is already losing momentum.
Our aim is to add to our precious metals positions once the intermediate low is in. Now is the time to be patient. There is no need to potentially catch a falling knife here.
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Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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