If gold gets to this level, it’s going to be really bad for stocks: Piper Jaffray

The next leg up for gold might be the true test for the stock market, says one technician.

"You've got to get a break above $1,365 specifically to really suggest that gold is starting a new leg higher," Craig Johnson, chief market technician at Piper Jaffray, told CNBC's "Trading Nation" on Friday. "If we get this break above $1,365, I got to tell you, that's going to be a real negative event for the overall market itself."

Johnson spoke on a day investors fled equities in favor of safe-haven assets like gold. On Monday, the precious metal was hovering above $1,331.

Gold typically outperforms equities when there is excess fear in the market or investors anticipate slower economic growth. Its performance can be used as a litmus test for investors' risk appetite.

If gold sees a major break to the upside, this would suggest investors are more bearish on equities and the economy.

"We're supposed to be in a pro-growth environment. We've got the tax cuts put in place, the economy is supposed to be doing better, and then you've got gold moving up? That's a pretty defensive move," said Johnson. "It would be a pretty negative meaning for a lot of investors if we break above that $1,365 level."

Gold added more than $8 an ounce to trade above $1,336 on Friday. A $1,365 level represents an increase of 2 percent.

The precious metal rallied to end the week as a sell-off wiped billions of dollars from the equity market. The Dow Jones industrial average declined by 572 points, while the S&P 500 slumped 2 percent. Stocks sold off as the chances of a trade war between China and the U.S. increased and Federal Reserve Chair Jerome Powell indicated a readiness to continue hiking rates this year.

Friday's gold rally aside, Susquehanna market strategist Stacey Gilbert does not see the metals markets signaling a major problem for equities yet.

"We are starting to see money move into gold but, amazingly, with the volatility in the market, … gold actually hasn't responded as positively as you would expect if there were true market fear out there," Gilbert said on "Trading Nation" on Friday.

If there were more panic in the market, Gilbert said, then she would expect to see much more money moving into gold and related ETFs than last week's level. The GLD Gold Trust SPDR ETF increased 0.5 percent last week and was up 2 percent since the beginning of the year as of Friday.

"We're not seeing significant fear," said Gilbert. "There's no volatility in the gold options, so right now I think investors are slowly building positions for the 'just in case', not the 'highly anticipate.'"

As of Friday, gold prices were up 2.4 percent for the year, while the S&P 500 dropped 2.6 percent. Gold prices touched the $1,365 level in late January but have not closed above it since August 2016.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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