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VIDEOPrecious Metals Equity Index Forms Triple Top; What's Next?
We could be just days away from a pop and drop in the price of gold.
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I'm going to go out on a limb in this report and cover what I think to be an intermediate top in the precious metals sector. Everyone I speak with and the hundreds of emails I've received suggest the vast majority are bullish on gold and silver. That being said, I feel we're three to eight days away from a pop and drop in the price of gold.
Below is my explanation as well as charts of what I think is unfolding.
HUI -- Gold Bugs Index
This chart tracks a basket of gold companies and can be used as a leading indicator for gold bullion at times. This index tends to lead the price of gold before rallies and also during declines. I've seen this lead by a few hours and even up to seven days. I find it outperforms when gold is about to rally, and underperforms when gold is topping or about to start another move down.
It looks as though we're forming a triple top, which also happens to be at a previous 2009 resistance level. Each time this level has been reached, sellers take control and send the market sharply lower. There have been several long upper wicks formed in the past few sessions telling me that buyers are pushing the price up, but sellers hit the sell button pulling the market right back down. If this triple top plays out, I'd expect a multi-month correction to take place.
UUP -- US Dollar ETF
The US dollar looks to have found support at the March/April lows and has put in a very solid rally. If the chart pattern is correct, then it looks as though the dollar will break out to the upside and run to $24.75 area. The relationship between the dollar and the precious metals sector is generally inverse, meaning if the dollar rallies, both gold and stocks should fall.
GLD -- Gold Bullion ETF
The chart of gold has identical patterns no matter if it’s this ETF or spot gold price. So this analysis goes for both ETF and gold bullion prices. The past two times gold rallied for this length of time without any sizable pauses, we saw the price of gold drop $70 per ounce and $140 per ounce which is equivalent to $7-$10 drop on this GLD fund -- a decent-sized move.
The chart is screaming of a nasty correction to occur any day now. With gold testing the June highs I feel it's only days away. What I'm looking for is a pierce of the June high. That will suck in the rest of the bulls as they jump on the band, and cause all the shorts to cover their positions. This causes a pop, and once buying starts to dry up, the big money will start to sell down the price to trigger the stops and start a multi-day waterfall sell-off.With the declining volume as the price grinds its way higher, it tells me fewer individuals want to buy in at these high prices. Once the price starts to slide it will cause the stops to be triggered. And because there haven't been any substantial pullbacks along the way, there's a larger number of stops sitting in the market waiting to get hit.
Mid-Week Precious Metals Trading Report
In short, I feel precious metals are on the verge of a sharp correction which may only last a few days, but the drop will be substantial. I still think we could see a few more up days or sideways sessions before this happens as the June high for gold bullion should be penetrated before the market truly reverses back down.
Anyone long gold, silver or PM stocks should be thinking of tightening their stops; and the gold bugs should mentally prepare themselves for a correction.
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