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Gold Forms Bullish Outside Day, Watch Dow Theory Divergence

(Kitco News) - Gold prices surged higher in mid morning action Monday, fueled by unconfirmed rumors that Greece and its IMF/EU creditors have reached a debt restructuring deal. The rumors have tugged the U.S. dollar index off its early highs, which in turn has boosted gold.

Technically, Monday's early action bodes bullishly for gold. The contract is forming a "bullish outside day," which means the high and low exceed the previous session's range. A higher close at today's final bell would be a bullish short-term signal for the yellow metal.

Near term, August Comex gold futures remain in a large multi-week neutral range, but the bullish outside day opens the door for a push back toward the recent range top. Since late March, August gold has traded between support at $1,170 per ounce and resistance at $1.232.80 per ounce.

August gold climbed above its 20-day moving average on Monday, and if sustained gains are seen above that line it would further embolden the bulls in the short-term. Next upside targets and resistance lie at $1,215.20 and then $1,232.80.

In related market action, a divergence has formed between the Dow Jones Industrial Average and the Dow Jones Transportation Average. According to venerable Dow Theory, the "averages must confirm," and the retreat in the transportation stocks shows the broader market is vulnerable to a correction or even a bear market. Like any technical signal it should not be used in isolation, but can be used in conjunction with other forms of analysis.

" We believe this divergence has issued a yellow alert for the stock market and should not be ignored. Indeed, it recently helped S&P Capital IQ’s Investment Policy Committee decide to lower the recommended exposure to U.S. equities, and increase the cash allocation," wrote Sam Stovall, chief U.S. equity strategist at S&P Capital IQ in a note to clients.

If stocks were to embark upon a meaningful correction or bear market, history shows that gold tends to perform well during those periods as a non-correlated asset to equities.


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By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht

 

 

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