For quite some time I’ve been harping on what might be the most simple, yet effective stand along buy signal for gold (GLD) and the gold mining stocks (GDX): Going long following oversold readings (30 or less) on the daily RSI. Just to reiterate, I also often state that using oversold & overbought readings alone, or any other single buy/sell indicator by itself is not advisable as oversold can become “more oversold” just as overbought can become “more overbought”, often exceeding many traders draw-down comfort level or stops. Overbought & oversold readings, just as with any other buy/sell signals, are best when used in conjunction with other confirming buy/sell signals.
GLD daily March 26th
One example of this would be the most recent long entry in GLD, which was posted pennies off the lows here on March 17th. That long entry was largely based on the fact that GLD was approaching a weekly support line which, in all three prior tags of that trendline, was immediately followed by very powerful rallies, each of which did not terminate until gold prices reached the top of that contracting channel/bullish falling wedge pattern (that chart can be viewed in the link above).
Other reasons for positioning long in GLD were discussed leading up to that long entry just over a week ago and in the past, as well in the annotations on the live chart of GLD, it has been stated that “Without a single exception, for more than a decade*, every oversold (below 30) reading on the daily RSI 14 was followed by a short or intermediate-term trend reversal either immediately or shortly thereafter.”
GDX daily March 26th
As was recently pointed out shortly before that latest long entry for GLD, gold prices had once again fallen to below the 30 level on the RSI, thereby indicating an extremely high probability of an impending trend reversal (i.e.- rally). Shortly after that oversold reading was highlight, it was then pointed out that GLD was approaching that weekly support level around the same time a solid case for a reversal in the $USD was also being made (dollar down = gold up).
The K.I.S.S. (keep it simple, stupid) part of this trade for going long either GLD or GDX (as the same overbought buy signals were also pointed out on the miners, which follow gold anyway) was the recent oversold readings in both. Those signals alone, even if they got you in a bit early, would have produced profitable trade to this point, which still has the potential to go much higher. The additional buy signals, both tangible (e.g.- GLD falling to long-term support) as well as intangible (an intuitional read or “guess”) that the recent breakdown in gold, although clearly bearish on face value solely looking at the daily chart, as most traders watch, would prove to be one more in a long string of recent “fake-outs” in the shiny metal.
Where do we go from here? As highlighted yesterday, gold & the mining stocks have some near-term overbought conditions to deal with in addition to the overhead resistance levels pointed out yesterday. As stated in then, my expectation is for some near-term consolidation, which so far has been the case with GDX reversing almost immediately after that update. How long and deep any pullback and/or consolidation lasts is hard to say but I’m watching the $USD & $Euro, along with the charts of GLD & GDX closely at this time & will continue to share my thoughts. My best guess, as mentioned in the currency post earlier today, is that the dollar is likely to bounce a bit with a pullback in the Euro following the tag of my 108.05 target on FXE.
Any strength in the dollar is likely to spark some profit taking in gold & the mining stocks. Near-term (days), I am neutral to slightly bearish on gold while cautiously bullish in the intermediate (weeks) & longer-term (months). Cautiously bullish because there is still quite a bit to technical work to be done to solidify the longer-term bullish case in gold as well as to build a case that the recent weakness in the $USD is anything more than just an overbought pullback vs. the early stages of a new downtrend in the dollar (certainly a possibility but again, just too early to say with a high degree of confidence).