The Modern-Day Gold Rush

Every time an asset class goes parabolic it captures my attention and gets my
contrarian juices going. Most recently, this asset class is gold. It seems that
gold has cracked; the question is whether this is a lasting peak and where the
next support can be found. What the media says about a soaring asset class is as
fascinating as what the chart says (first the media, than the chart). Here are a
few headlines from Aug. 22, when gold closed at $1,901. Gold at $1,870 is being
seen as a haven Forbes Gold price poised to go parabolic to $2,100 Beacon
Equity Research Gold Shines On and On and On The Wall Street Journal Gold in
portfolio is mandatory MoneyControl.com Is $5,000/ounce the new target in golds
run? Barrons The media speaks, investors listen. Also on Monday, The Wall
Street Journal reported that the SPDR Gold Trust (NYSE: GLD ) is now bigger than
the SPDR S&P 500 ETF (NYSE: SPY ). Sure enough, the medias relentless hype has
fueled the modern-day gold rush. 170 years ago, investors armed themselves with
picks, pans and shovels to get their hands on the precious yellow metal. Today,
investors can buy unlimited amounts of gold sitting in their underwear in front
of a computer or with their cell phone while driving. This kind of trading
flexibility causes irrational price spikes like what weve seen in gold over the
last couple of weeks. What Melts Up, Will Melt Down The chart below shows the
performance of gold since July 1. The two yellow lines are trend lines that go
back as far as 2006. The push above the first trend line on July 12 was bullish.
The push above the second trend line on Aug. 8 also was bullish. There was no
reason to bet against the up trend as long as gold remained above the trend
line. In addition to the rise above the trend line, percentR (a measure of
relative strength) triggered a low-risk bullish entry on Friday, Aug. 12. As
long as gold remains above the Aug. 12 low at $1,726.30, the trend was up.
Within the next few days, however, gold turned irrational and shot from $1,726
to over $1,900. When it comes to trading irrational markets, investors would do
well to be cautious. At $1,900, the upside for gold seemed very limited, and on
Sunday, I thought, I dont know how much higher gold will spike but Im pretty
sure it will melt down faster than its melting up. This weeks r1 is at 1,915, r2
is at $1,975. A failed daily low-risk entry would be a good time to go short. In
case you are wondering, r1 and r2 are pivot-based support/resistance levels I
use to identify potential turning points. Gold peaked at $1,915 and has dropped
over 150 points (nearly 10%) since. My thoughts on Tuesday (Aug. 23) were the
following about a key level for gold: A daily close below $1,826 would be
bearish. As long as gold remains above $1,826 the trend is up. Tuesdays big red
candle engulfs Mondays green candle, generally a bearish sign. If gold falls
below $1,826 it may coincide with rising stock prices. Aggressive investors may
short gold if it drops below $1,826 with a stop-loss just above. The
corresponding price for GLD is $177.50. PercentR provided an early warning
signal when silver (NYSE: SLV ) cracked in late April and allowed me to capture
a 30%-plus move. Now percentR has done the same thing for gold. Since it moved
below $1,826, gold has been in a free fall, currently at $1,754 (GLD is at
$170.50). Where is the Support? The most immediate support is this weeks s1 at
$1,763 and where the Aug. 12, low-risk entry was triggered, at $1,726.30. Next
support is the upper trend line at $1,710. The most important support and quite
possibly the target for this correction is a moving average that has provided
support for gold on no less than seven different occasions since 2009. How will
the mini melt down in gold affect stocks? In late April, the meltdown in silver
came a few days before the S&P, Dow Jones and Nasdaq peaked. Is this a repeat of
late April? Its too early to tell, but based on our analysis, new lows for the
major stock indexes are likely.