Initiating a long term bullish position in goldThis is an analysis that I hope that it ages well, as I am starting a long term position in gold today and adding this asset to my investment portfolio. Therefore, this is not a post about an isolated trade, with a specific expiration date or focused on the short-term.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, This is an analysis that I hope that it ages well, as I am starting a long term position in gold today and adding this asset to my investment portfolio. Therefore, this is not a post about an isolated trade, with a specific expiration date or focused on the short-term.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, fears involved, strategies to control them and analysis paralysis may also be written later (spoiler: risk sizing and embracing the risk consciously helps to tame the beast) .
However, from an investment point of view, with a long-term perspective and also taking advantage of some hedging to reduce risk, it is better to buy gold late than never, or as I prefer to say, better late than too late. Because if a strong bull run starts after this breakout, I would regret not buying at the $2000 quote level. And, yes, there are indications that this may become a reality.
The first indication comes from the analysis of the chart, gold prices have been stuck into a multi-year congestion between $1700 and $2000. Tipically, the longer the congestion is, the more intense its breakout and further away the target, and historically gold has been king of this setup. The $2000 level is where the price peaked during the covid crisis and the russian invasion of Ukraine. I mean, this price level is imposing a very strong limit on quotations. But we're now facing the threat of a future interest rate and expected inflation much higher than we've been used to over the last decades (since the 90s, specifically), and these things could be a real game changer for the market scenario. So, here the gold quotes are, back at the $2000 resistance level and showing strong volume near it. Of course, resistance can work once again, but we have to trade probabilities and deal with risk, and that means grabbing a good entry opportunity like this one, and accepting a loss if the signal deviates.
The second indication comes from the analysis of the market cycle. All clues point to the fact that we may already be at the beginning of a secular bear market cycle, which means that expected future returns for the next years (10y average) can be near zero, single digit, or even negative. I'm not predicting some kind of crash here, it's different, this is not a single intense bearish movement, but a future outlook of low stock market growth. Using the model published by Ed Easterling in his book, Unexpected Returns, the top (thus the beginning of the end) of a secular bull market comes with high P/E's, low dividend yields, low inflation and low interest rates. This was just the scenario we had few years ago and it started to crack, first inflation got out of control (2021), then interest rates started to rise (2022) and P/E's just began to fall with last year falling quotes, but it's still on a high level, so this could just be the beginning of this cycle of low returns.
With this in mind, it is important to notice that gold is often the best secular bear market asset par excellence (see the returns in the 2000s and in the 1970s periods), but so far in this newborn bear cycle, gold has yet to shine, despite the very bearish year of 2022.
Considering the secular bear market hypothesis and the very long chart congestion, added to the habit of this asset to make strong breakouts, I decided to initiate a long term bullish position in gold. I made my entry using the ETF GLD. I bought the shares today, March 20th, 2023, at the market opening, @184.17. To manage my risk I also bought a bear put spread with strikes 166/165. I intend to stop the loss if this entry reaches a -6.5% loss. I've bought enough options to pay back my losses if that happens. The protection has cost me 0,8% of the position. Hopefully in the future I will post more about this position, and then I will use the GLD chart. For now, for a general approach, I prefer to do my analysis using the future contract chart.
Seculartrend
SPX Falls Below the Midpoint of Its 13-Year Uptrend ChannelPrimary Chart: Logarithmic Chart with 13-Year Secular Uptrend Defined by Parallel Channel
BRIEF SUMMARY:
The secular uptrend over the past 13 years is still valid and contains within its boundaries the current bear market, which is at the primary trend level.
SPX's price has fallen past the midpoint of the channel. Two weekly closes have been below the midpoint of this channel. This week's close was lower than last weeks, which is not bullish at all, even if an oversold relief rally is becoming more likely.
The lower edge of the channel, called the upward trendline, lies at 3000 to 3200 from year end to about May 2023. If this bear market lasts that long, the lower edge of the channel may provide a good spot for the bear to end—or for a much longer-term shift in trend should that line break.
SPX has been in what technicians call a secular uptrend for approximately 13 years. A secular trend is an even higher degree of trend than the commonly discussed "primary trend." A primary trend typically ranges from about 9 months to 2 years. Two recent examples illustrate the primary trend: (1) The bull market from the March 2020 lows to the January 2022 highs, and (2) the bear market from the January 2022 high to the present date (9 months exactly).
By contrast, a secular trend is about 12-25 years long according to technical expert Martin Pring. When examining the price on a weekly chart from the lows of the 2008-2009 crash (the Great Financial Crisis) to the present date, one can find that the price has stayed within a trend channel, respecting its upper and lower boundaries more or less.
Will the channel break to show a much larger and longer-term shift in change? That is a question that no one can answer, but it will be worth noting whether price breaks or finds support at the channels lower boundary, the upward trendline.
Recently, price broke through the midpoint of this channel . Last week was the first weekly close below the midpoint. This week followed through with a decisive move lower and a second close below the midpoint—along with a lower weekly low. This is not bullish no matter how oversold oscillators and indicators may be. Speaking of oscillators, what oscillators predicted whether the June 2022 lows would be undercut? None: they all looked like they could be oversold, or close enough to oversold to work for a double bottom.
The double-bottom conversation also suggests that capitulation is not present. The widespread discussion of the term is actually bullish, reflecting hopes that the market will reverse its downtrend and put in a bullish reversal formation that will lead back to all-time highs. Is that the sort of sentiment that is commonly seen at a true bear-market low? The five stages of a bear market include denial, anger, bargaining, depression, and acceptance. Could equity markets still be in denial? Or have markets moved to the third stage of bargaining? With all the talk of "double bottoms," in both equities and crypto, perhaps the current stage is "bargaining." Why? By describing the present selloff in this bear market as a "double bottom," market participants attempt to place the current ugly decline in a positive light. A double bottom, after all, is a pattern that implies a powerful rally after the second bottom, where the rally eventually exceeds the peak between the two bottoms and continues thereafter once confirmed. So all the banter about double bottoms shows that a lot of bullish hopes still have not been crushed. The end of a bear market, however, evidences the fourth and fifth stages of bear-market grief, which is depression and acceptance (capitulation).
Sure, a double bottom could lead to a nice bounce because oversold extremes tend to cause mean reversions anyway, and when everyone is looking at a double bottom, shorts may cover and investors may try to pick the bottom. That is why my hypothetical arrow shows a jagged trip to the lower upward trendline of the parallel channel. First a little lower, then higher in another OS bounce / bear rally, then lower again, then up as people try to catch the low, then lower again, and so on.
Eventually, price may likely come into contact with the lower edge of the channel—and the long-term secular uptrend will still be intact and neatly contain this bear market. In other words, this bear market at the level of primary trend will not invalidate the secular uptrend, unless price breaks that line around SPX 3000-3100 (considering where the line lies in 3 to 6 months).
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Author's Comments:
(1) Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate in the comment section. Shared charts are especially helpful to support any opposing or alternative view.
(2) This technical-analysis view does not constitute a trade recommendation or trade setup. Instead, it attempts to offer technical commentary that describes and analyzes price levels, trends, price action, or the broader technical environment as of the publication date. Technical-analysis commentary does not equate to trade setups or recommendations. Within a given price environment, traders bear responsibility for their own trading strategy, risk tolerance, and time frame, and for any due diligence associated with such trades.
(3) This technical-analysis viewpoint could change at a moment's notice, e.g., when price violates a key level of invalidation for a particular view. Further, proper risk-management techniques are vital to trading success.
(4) To the extent countertrend price moves are discussed, consider that countertrend or mean-reversion trading, e.g., trading a rally in a bear market, remains higher risk and lower probability even for the most experienced traders and investors.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified / licensed financial adviser or other financial or investment professional before entering any trade, investment or other transaction.