A Time for Caution for Short Term Traders

About this time last month, gold and gold stocks, as well as silver experienced what some might call a crash. From these lows, we have seen a spectacular rebound, with gold bouncing back almost 80 dollars an ounce. However, it is impossible for this rebound to continue at this pace forever. In this post I will present evidence that suggests that gold may be at a point where it needs to take a breather before moving higher again.

Firstly, gold, as represented by the gold ETF, GLD, is at its May 2006 high. I suspect that I am not the only one aware of this, and that there may be sell orders sitting at this level:


In addition, gold stocks, as represented by the XAU, are in a similar position. The XAU is at its May 2006 high as well. Furthermore, if you look closely, you will see that the XAU formed a shooting star candle formation today:



That being said, the trend, clearly is still up, so it may be wise to wait for additional confirmation before taking profits. If there is to be a correction, I suspect that it would be a minor one. This is because some long term developments have recently occurred that are highly bullish for the yellow metal.

The main long term development is that the US dollar has broken 80, and the other is that the Euro has broken through resistance (which I recently stated would likely happen in the article regarding the point and figure charts). I will talk about these developments in a much longer post on the weekend.