For one, the Coppock Guide measure of momentum for the daily price of the SPDR Gold Trust bottomed on March 19, 2012 and appears set to improve into mid-April. Weekly momentum is decidedly weaker, however it appears as though a short-term bounce in prices can temporarily stave off deterioration in the intermediate degree gauge. Exhibit 1 demonstrates the short- and intermediate-term momentum condition for GLD.
Moreover, recent data shows that, aside from the late-Dec 2011 / early-Jan 2012 print, sentiment for gold got as low as it had been over the course of the last decade. As such, sentiment too is supportive of the idea of a short-term rally for the yellow metal. By the way, the low sentiment readings registered around the end of last year preceded a 17.5% rally that only petered out at the end of February. Exhibit 2 shows SentimenTrader.com’s composite sentiment indicator for gold.
And finally, Exhibit 3 demonstrates a technical pattern referred to as an ‘island reversal’ on the daily chart for GLD. A bullish island reversal on a daily chart is a three-day phenomenon that occurs when both the high price for a particular day is lower than the preceding day’s low price, and the next day’s low price is higher than the previous day’s high price. As is clear from the chart, a bullish island reversal leaves one bar isolated—on an island, so to speak. The isolated bar usually marks a turning point.
The five circled bars on the chart show recent ‘island reversal’ patterns for GLD. Of the four occurrences identified between the middle of May 2011 and March 20, 2012 (coincidentally, all bullish), three precisely marked bottoms, while the other was a false alarm. The bad signal (registered September 8, 2011) coincided with overbought momentum and optimistic sentiment, which is to say that environmental indications existed that cast doubts on the validity of the observation. Contrarily, the three times that the pattern served as an accurate buy trigger featured oversold and/or bottoming momentum and more dour sentiment conditions, as is currently the case. It is this confluence of circumstances that provides reasonable confidence in the expectation that the near-term path for gold prices is up.
As always, trade safe and stay nimble!