Protect Your Profits, Gold Rally Could Soon Lose Its Shine

This commentary originally appeared on Real Money Pro at 11:17 a.m. ET on Apr. 12. Click here to learn about this dynamic market information service for active traders.

Although the stock market has essentially shrugged off geopolitical risk involving Syria, Russian, China, and the U.S., the gold market has been paying close attention. Further, the gold bulls have been aggressive buyers on dips, pushing prices roughly $150 per ounce off the December lows.

This marks a 13% rally in a handful of months and, in our view, could be suggesting most of the buying has already taken place. Let us not forget, gold is the only commodity that offers no real value to its holders. It is not regularly used in manufacturing or industry; instead, its value is based on mere perception. Whether we perceive it as being valuable as jewelry, decoration, or some sort of holder of wealth during a catastrophe, it is not a useful commodity nor is it a liquid form of barter. People buy it out of their belief in value, not its true worth. Nevertheless, there are always trading opportunities in gold, so we all pay attention.

Seasonal traders know that gold has a strong tendency to move higher from January through early March, but they also know that the seasonal buying dries up in mid-March or April. From there, the gold market generally trades sideways to lower going into the summer months. This should work against lofty precious metals prices.

Ironically, gold and the dollar have gone up together in recent weeks. This is in contrast to the typical inverse relationship. However, we believe the more traditional behavior of gold in relation to the greenback will reemerge in the coming weeks. If so, the gold market might taper to adjust for its lack of reaction to the dollar rally.

In short, anybody long gold from the current levels must be confident that political turmoil will be concerning enough to keep buyers active, because there will likely be little help from other antagonists. Looking at the daily gold chart, we see similar hindrances to the continuation of the gold rally.

Our go-to technical oscillators, the RSI (Relative Strength Index) and the Williams %R are both suggesting a slightly overheated gold market. Specifically, the RSI is approaching a reading of 70, which has, in the recent past, been trouble for gold rallies. Similarly, the Williams %R is hovering near 94 out of a maximum reading of 100. Neither of these indicators guarantees gold will find an intermediate high, but they certainly increase the odds of such a reversal.

In addition, the current trading range, along with our proprietary volatility analysis, suggest gold prices should face swift resistance near $1,290. Even if prices surpass this level, gold bulls will have to contend with the psychological resistance level of $1,300.

In conclusion, if you made money in gold on the way up, you should be protecting profits.

There is a substantial risk of loss in trading commodity futures, options, ETFs. Seasonal tendencies are already priced into market values.

At the time of publication, Garner had no positions in the stocks mentioned.