Dorn: Playing Gold & Gold Stocks

The hills are abuzz with the sounds of gold going to the moon. I have seen more bullish articles on gold over this weekend than in some time.

My neighbors are asking about buying gold. This makes me look the other way. Remember that when everyone is looking in the same direction, no one is really looking.

Last week, spot gold rose from $930.50 to $958.10 and gold stocks tacked on between 10 percent to 20 percent. That is a nice run for one week, but is there more coming this week?

The always interesting and insightful Peter Brimelow writes on www.marketwatch.com: “Gold On The Verge Of Historic Breakout? Is this it for gold? After a good week, gold watchers of all stripes think it may be. Again.” Brimelow goes on to quote a litany of positive comments about gold from a number of well-known chartists:

Martin Pring says “…gold could be on the verge of a historical breakout. Watch that $990-1000 area like a hawk.”

Richard Russell noted “a sensational breakout in GDX on Friday” and added “Ordinarily I would add gold items on a correction, but gold seems on a roll now, so I added GDX.”

James Turk remarked that he is considering altering his “normally-cautious” trading style because "…there is obviously an exceptional opportunity to load up (leverage) by buying gold. “

My view is that the gold market is getting ahead of itself and due for a healthy pullback. The $XAU (PHLX Gold and Silver Sector Index) looks like it is in a blow-off phase that will set the stage for a healthy correction before it attempts an assault on the previous highs.

There is a strong band of resistance between the 155-165 areas. It is unlikely to get through this without a significant pullback. The continuous contract on gold is poking its head over the upper Keltner channel and looks vulnerable to a pullback into the 859-860 area. This might be enough to frighten all those buying in late to the party, and could coincide with Comex options that expire on May 26 and options expiration later this coming week.

Also, the hideous action in the U.S. dollar may be ready to take a break and stabilize for a couple of weeks. A rally in the dollar and strengthening of the Japanese yen do not bode well for the broad equity markets or the gold market.

As always, we don’t trade the analysis, but let the price action and order flow tell us what to do. Aggressive and nimble traders can take a short position in the gold futures or go long the DZZ for the anticipated correction. Caution is warranted here, since “surprises” in bull markets tend to be to the upside.

Others who do not trade the gold futures can wait for a pullback into the 859-860 area and then go long through several GLD , IAU or the leveraged DGP for the up move. This move is likely to begin sometime in mid-end June and take gold up to the 1050-1350 area by early 2010.

Don’t anticipate and don’t chase; rather, try to catch the middle of the move — both on the downside and the upside.

It is good to remember that the trading brain will always be greedy when it should be fearful and vice versa.

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Dr. Janice Dorn is the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and manages a subscription-based website. Dr. Dorn has been trading the gold futures markets full time since 1993. She has written over 1000 articles on trader and investor psychology, and mentored over 600 traders and investors.She writes on all aspects of trading psychology and provides a real-time trading service on her website: TheTradingDoctor.com.