Technically Speaking

"Gold S(t)inks"

Source: DTN ProhpetX

Way back when, 1980 I believe, the J. Geils Band released a song title "Love Stinks". Flash forward 35 years and commodity investors might tell you "love" has been replaced by another four-letter word - gold.

That smell you've picked up wafting across the commodity sector isn't sulfur, reportedly called by those roaming the earth eons ago as "The Smell of Hell", but gold. So much so that this morning's MarketWatch website has numerous articles on the odiferous market, the most intriguing discussing a study concluding gold's target price may be $350 per ounce. Pee-yew! Smells not like teen spirit, but rather a large pile of dead, rotting gold bugs.

From a technical point of view, is there any merit to the idea of an additional $600-plus sell-off in the once gold standard of commodities? (A sidenote, according to another recent MarketWatch article, there is no merit to technical analysis itself.) With the end of July fast approaching, let's turn to gold's continuous monthly chart.

This month has seen the August contract post a new low (for this downtrend) of $1,072.30, a price not seen since February 2010 (follow the dotted red line to the left). Meanwhile, monthly stochastics (second study) are inching back toward the oversold level of 20% (not surprising) and the noncommercial net-futures position (bottom study) has been trimmed to its lowest level (28,279 contracts) since November 2013.

So, how might this play out.

My analysis continues to show the U.S. dollar index (USDX) remains in a major (long-term) downtrend*. That being the case, and given the strong inverse relationship between gold and the USDX thee implication would be the former should soon find renewed buying interest, particularly from global investment (noncommercial) trades. If so, Newton's First Law of Trend Analysis should come into play (A trending market will stay in that trend until acted upon by an outside force, with that force usually being noncommercial activity.) and the major trend should turn up again.

This conclusion would seem to fit with what has been shown in monthly stochastics, given the last major signal was a bullish crossover below the oversold level of 20% at the end of February 2014. Sometimes it takes a while for momentum to actually change.

If the technical picture plays out as it is set up late in July, a fall to $350 seems unlikely in gold -- short-term or long-term. However, as I'll discuss in Friday's On the Market column the landscape of commodity analysis is being changed, as if acted upon by a volcano. Complete with the smell of burning sulfur, or gold.

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