Beware the Bearish Signal From Metals

Bloomberg ran a piece this mornrning titled, Gold Bears Retreat as Price Reaches Two-Month High. It was filled with the usual… some data, some commentary on well-known investors (Soros and Paulson), and a general lack of conclusions or actionable advice.

Fair enough. Bloomberg is a newswire.

Yet, I got all I needed from that headline, which tells me: “GO SHORT!”

Analysts love to “call” a bottom. It’s an ego-driven endeavor. And it’s usually a foolish one.

Sure, gold at a two-month high is notable. And those quick to call the gold sell-off over are hoping a two-month high soon turnrns into a three-month high, then a six-month high… and eventually we’ll be back to the $1,900-an-ounce good ol’ days.

As a trader, I usually see trends resolve differently. They rarely turnrn so suddenly. Instead, what value investors call “a move off the bottom,” ends up being just another bear-market rally, giving traders higher prices from which to sell short.

I suspect that’s the case for gold now.

Here are charts of the four major metal markets: gold, silver, platinum and copper. They all point to the same (bearish) conclusion.

See larger image

I see three good reasons to make a tactical bet against metals right now:

  1. Prices hitting resistance levels: gold at $1,375, silver at $24, copper at $3.38 and platinum at $1,520.
  2. The Relative Strength Indicator (RSI) shows a near-term overbought condition.
  3. The bearish two-day and three-day candlestick patternrns.

This isn’t the place to elaborate on those technical elements. All you need to know is, if you’re looking to trade WITH the trend (which has been down for the metals markets), the two-month price highs are merely a bounce that serves as a good entry point for short positions.

I think anyone trying to call this a bottom will be proven wrong before long. We see gold prices going as low as $750, so this is just the beginning!

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.