Factors like option volatility, volume, and price action in gold ETF GLD combine to act as a solid leading indicator for the equities market, explains one trader, citing recent charts as confirmation.

The past few weeks, traders and investors have been completely spooked from the surge of negative news and collapsing stock prices. This fear can be seen just by looking at the volume on the SPDR Gold Trust (GLD). With gold being in the spotlight for several years now, and the fact that anyone can own gold simply by buying GLD shares, it only makes sense that reading the volume on this chart gives us a good feel for what the masses are feeling emotionally.

If we step back to trading basics, we know that fear is the strongest force in the financial market for moving prices. There are a few ways to read fear in the markets, and the more factors that line up at the same time, the higher the probability of a trend reversal in the near future.

There are three things I watch that in combination act as a leading indicator for the equities market:

  1. The first thing I look for is a rising Volatility Index (VIX). This index rises when investors become fearful of stock prices falling by hedging positions or flat out buying put options to profit from a falling market

Second, I look for a high selling volume ratio, meaning at least 3:1 shares traded are from individuals hitting the sell button in a panic, thinking that the market is about to collapseAnd last but not least, I look at GLD volume and price action. A surge in GLD volume after a strong move up means everyone is scared and dumping their money into a safe haven

Let’s take a look at some charts to get a better feel.

SPDR Gold Trust (GLD) Weekly Chart

As you can see below, there are sizable price movements that ended with strong volume surges. Those volume surges mean that the majority of investors have reached the same emotional level and bought gold (GLD) for safety.

Keep in mind that the big money players and market makers can see this taking place, and that is when they start selling into that surge of buying volume, locking in maximum gains before there are no more buyers left to hold the price up. Tops generally take a few weeks to form, so don’t expect a one-day collapse.

The recent rally in gold has taken place when stocks have fallen sharply. Money has been pulled out of stocks and been pushed into gold, but I think that is about to change.

chart

Click to Enlarge

The past month has been a bloodbath for stocks. But from looking at the charts, volume, and the fear in the market, I can’t help but think we are going to see higher stock prices. As traders and investors see stocks moving higher, they will pull money out of gold and dump it back into stocks, and likely high-dividend-paying stocks at that.

chart

Click to Enlarge

In short, everyone piled into gold, sending it skyrocketing higher, and I feel gold has moved too far too fast and is ready for a pullback, perhaps a pause lasting two to 12 weeks.

In association with gold’s pullback, I feel traders are now realizing they sold their stocks at the bottom of this correction because fear took hold of their decisions. Now they are starting to think about getting long stocks, but it still may be a bumpy ride for a few weeks yet. Stay frosty, traders.

By Chris Vermeulen of TheGoldAndOilGuy.com

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  3. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  4. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Growth

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
  8. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  10. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!