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Hold Off on Gold and Look Long for Crude Oil


The markets may be worse than the tape has shown.


Summary of Yesterday's Notable Technical Developments

The chart below shows how the asset classes reacted to yesterday afternoon's Fed announcement. The important takeaway from yesterday's action is that despite getting a lift, risk assets remain below their recent downtrend lines and even further below key monthly closing levels. With tomorrow being the last trading day of the month, it appears unlikely the major stock indexes will close above those important levels (1,146; 2,271; and 10,507). Most low-risk entries on favorable technical setups in stocks and commodities haven't worked in recent days. This is a very important clue and suggests the markets may be worse than the tape has shown.

Click to enlarge

Market Internals: NASDAQ
(Figures are rounded)

Critical Market Components (with ETF proxies)

US Dollar Index (DXY): First Support: 78.00 (23.02 for UUP) is horizontal line created by previous resistance. First Resistance: 78.81 (23.20 for UUP) was the 1/21 intraday high (wave (a) high).

Commodity ETF (DBC): First Support: right here at 23.03, the close on June 29, 2009.
First Resistance: 24.00 was the August 5, 2009 high and also was support for a while.

Crude Oil Futures: First Support: very nearby at 72.65 (35.22 for USO), which is Tuesday's intraday low. First Resistance: 74.00 (37.09 for USO) is horizontal line resistance; and underbelly of broken trend line for USO.

Gold Futures: First Support: 1,075.20 (105.31 for GLD) is the December 12, 2009 intraday low. First Resistance: 1,151.40 (113.59 for GLD) was the peak for wave b of abc correction.

Key Charts
Daily Chart of Gold Futures

Click to enlarge

  • Close examination of gold's daily chart yields valuable nuggets for both bears and bulls.

  • Bears will likely prosper first, as the Elliott Wave count puts gold in wave c and 4 with a 100% Fibonacci price projection of $1,008.30. That level corresponds with the 61.80% Fibonacci retracement (of wave 3) level, making it an even more likely target.

  • Bulls -- still with reason to be optimistic -- may have to be more patient, but the rewards should be greater. Presently, gold is making a stand in the band of support that ranges from $1,075.20 to $1,086. Gold still has a solid uptrend in place, which currently comes in right below the $1,075.20 level. The Elliott Wave count is in a long-term bullish position: currently in the fourth of a five-wave sequence higher with ultimate upside potential to the $1,300s. The RSI (see chart) for gold is still holding support at 38.96, which lends credibility to the argument that gold may yet hold support at the $1,075-$1,086 level. Any break below $1,075 will likely be accompanied by a break of support in the RSI.

  • Overall, my outlook for gold includes an eventual breakdown below the $1,075 horizontal line support and the uptrend line just below that. The ultimate downside target is the $1,007-$1,008 area, which is the confluence of Fibonacci levels outlined above.

  • While this move lower in gold may not happen in the next few days, it is with great confidence that I make this projection. However, any move above the $1,151.40 level will negate my view that $1,007-$1,008 will eventually be hit during this move.

  • Once this wave 4 move has concluded, I'll turn very bullish on gold in anticipation of a wave 5 move higher that could reach the $1,300s.

Strategy: Hold off on major gold purchases until the gold futures trade down to projected support near $1,008. That will be the appropriate level to enter full positions. As a caveat, if I'm wrong and the wave 4 move is over, then a close above the $1,151.40 level should be bought immediately.

Daily Chart of Oil Futures

Click to enlarge

  • Everyone knows crude oil futures have been on a major slide of late. However, yesterday's action may have brought crude down to a tempting entry point right at the juncture of its uptrend line and a horizontal band (see green highlights on chart) going back to June of 2009.

  • A warning sign, however, is that crude actually closed slightly below the uptrend line that has been in place since March 2009.

  • Another concern is that overall volume in crude futures has been rising during down moves and declining during up moves. That is clearly the opposite of what crude oil bulls would like to see.

  • Lastly, it should be noted that USO -- the exchange-traded fund that mirrors the commodity's directional movements -- has already broken down below its uptrend line.

Strategy: Extremely nimble traders may enter long positions in crude oil futures with an initial upside target of $79.32 and a stop-loss level on any close below $73.45. Those not able to quickly exit positions if conditions merit should wait to enter long positions. If oil doesn't rally from here, $70.35 may offer patient traders a better entry.

For more on gold, oil and corresponding ETF plays, take a FREE 14 day trial to our Grail ETF & Equity Investor newsletter. Ron Coby & Denny Lamson find ETFs poised for big moves. One recent oil trade gained subscribers 22% in one month. Learn more

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No positions in stocks mentioned.

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